Finalprojet (Intro)

RBI REGULATORY MEASURES FOR COMMERCIAL BANKS AND CO-OPERATIVE BANK
BACHELOR OF COMMERCE BANKING & INSURANCE SEMESTER V
Submitted In Partial Fulfillment of the requirements For the Award of the Degree of Bachelor of Commerce Banking & Insurance By
SHIVANAND .S. MALED

ROLL NO. 28
RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS
C E R T I F I C A T E
This
is
to
certify
that
Shri
Miss
_____________________________ of B.Com Banking &

Insurance Semester V the project on (2008-09) has successfully completed _________________________ .
under the guidance of
Course Coordinator
Principal
Project Guide/ Internal Examiner
External Examiner
VES COLLEGE OF ARTS, SCIENCE AND COMMERCE
DECLARATION
I, __________________________________ , the student of B.Com Banking & Insurance Semester V (2008-09) hereby declare that I have completed this project on ______________________________ The information submitted is true & original to the best of my knowledge.
Students Signature
SHIVANAND .S. MALED Roll No. 28
ACKNOWLEDGEMENT
At the outset, I take the privilege to convey my gratitude to those who have cooperated, supported, helped and suggested me to accomplish the project work. I would like to thank University of Mumbai for handing over this project to me. This project bears imprint of many persons who are either directly or indirectly involved in the completion of the project. I would like to thanks my guide Prof. Mrs. MINAL GANDHI for her valuable guidance throughout the Semester. I would also like to thank our principal Mrs. J.K. PHADNIS and our coordinator Prof. Mr. SACHIN BHANDARKAR for their cooperation and help.
EXECUTIVE SUMMARY
The Reserve Bank of India 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: a. Regulating the issue of bank notes. b. Keeping of reserves for ensuring monetary stability. c. Generally to operate the currency and credit system of the country to its advantage. The role of the bank as regulator of banking sector is mainly by virtue of the provisions of the Banking Regulation Act, 1949. In exercise of the powers under that act, the bank regulates the entry into banking business by licensing, exercises control over shareholding and voting rights of shareholders, e-exercises controls over the managerial persons and regulates the business of banks. The bank also inspects banks and exercises supervisory powers and may issue directions from time to time in public interest of the banking system with respect to interest rates, lending limits, investments and various other matters. The major powers of the bank in the different roles as regulator and supervisor can be summed as under: a. Power to license.
b. Power of appointment and removal of banking boards/personnel. c. Power to regulate the business of banks. d. Power of give directions. e. Power to inspect and supervise banks. f. Power regarding audit of banks. g. Powers to collect and furnish credit information. h. Power relating to moratorium, amalgamation and winding up. i. Powers to impose penalties. A Co-operative Bank is a co-operative society engaged in the business of banking and may be a primary Co-operative bank, a distinct central co-operative bank or a state c-operative bank. Co-operative banks operating in one state only are registered under the State co-operative Societies Act concerned. The formation of such banks as well as their management and control over personnel is regulated by the co-operative law of the state. The Registrar of co-operative societies under the Co-operative Societies Act exercises a wide range of powers on co-operative societies from registration to winding up. With the introduction of section 56 in the banking regulation act, 1949 with effect from 1965 co-operative banks have come 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, licensing and regulation of banking business rests with the Reserve Bank over these banks.
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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. The circumstances in which Reserve Bank may require winding up are mentioned in Section 13D of the Act. Commercial banks play an important role in directing the affairs of the economy. Commercial bank regulation involves three federal agencies and fifty state agencies. Currently in most jurisdiction commercial banks are regulated by Government entities and require a special bank license to operate. Scheduled Commercial Banks are required to maintain with RBI an average cash balance and required to submit a provisional return in Form A.
These are the scheduled commercial banks, the regional rural banks which operate in rural areas not covered by the scheduled banks and the co-operative banks and special purpose rural banks. Banking regulation act, 1949 was enacted to consolidate and amend the law relating to banking and to provide for a suitable framework for regulating the banking companies. Initially the act provided for regulation of banking companies only, but in 1965 the Act was amended to cover Cooperative banks as well, with certain modifications.
INDEX
SR.NO 1. 2. 3. 4. 5. 6.
PARTICULARS CENTRAL BANKING CENTRAL BANKING IN INDIA TYPES OF BANKS COMMERCIAL BANKS CO-OPERATIVE BANKS RELATIONSHIP BETWEEN THE COMMERCIAL BANKS AND CO-OPERATIVE BANKS
PAGE NO 2 15 25 26 31 38
7. 8. 9. 10.
BANKING REGULATION ACT, 1949 BANKING REGULATIONS FOR COMMERCIAL BANKS BANKING REGULATIONS FOR CO-OPERATIVE BANKS CONCLUSION
43 46 55 65

INTRODUCTION TO CENTRAL BANKING

A central bank, reserve bank, or monetary authority is the entity responsible for the monetary policy of a country or of a group of member states. Its primary responsibility is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a "bailout" lender of last resort to the banking sector during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently. Most richer countries today have an "independent" central bank, that is, one which operates under rules designed to prevent political interference. Examples include the European Central Bank and the U.S. Federal Reserve. Some central banks are publicly owned, and others are privately owned. In practice, there is little difference between public and private ownership, since in the latter case almost all profits of the bank are paid to the government either as a tax or a transfer to the government.
Activities and responsibilities

Functions of a central bank (not all functions are carried out by all banks):
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Implementation of monetary policy Controls the nation's entire money supply The Government's banker and the bankers' bank ("Lender of Manages the country's foreign exchange and gold reserves Regulation and supervision of the banking industry: Setting the official interest rate - used to manage both
Last Resort")
and the Government's stock register;

inflation and the country's exchange rate - and ensuring that this rate takes effect via a variety of policy mechanisms
MONETARY POLICY
Central banks implement a country's chosen monetary policy. At the most basic level, this involves establishing what form of currency the country may have, whether a fiat currency, goldVES COLLEGE OF ARTS, SCIENCE AND COMMERCE
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backed currency (disallowed for countries with membership of the IMF), currency board or a currency union. When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of promissory note: a promise to exchange the note for "money" under certain circumstances. Historically, this was often a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the "promise to pay" consists of nothing more than a promise to pay the same sum in the same currency.
The ECB building in Frankfurt
In many countries, the central bank may use another country's currency either directly (in a currency union), or indirectly, by using a currency board. In the latter case, local currency is directly backed by the central bank's holdings of a foreign currency
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in a fixed-ratio; this mechanism is used, notably, in Hong Kong and Estonia. In countries with fiat money, monetary policy may be used as a shorthand form for the interest rate targets and other active measures undertaken by the monetary authority.
Currency Issuance
Many central banks are "banks" in the sense that they hold assets (foreign exchange, gold, and other financial assets) and liabilities. A central bank's primary liabilities are the currency outstanding, and these liabilities are backed by the assets the bank owns. Central banks generally earn money by issuing currency notes and "selling" them to the public for interest-bearing assets, such as government bonds. Since currency usually pays no interest, the difference in interest generates income. In most central banking systems, this income is remitted to the government. The European Central Bank remits its interest income to its owners, the central banks of the member countries of the European Union. Although central banks generally hold government debt, in some countries the outstanding amount of government debt is smaller than the amount the central bank may wish to hold. In many countries, central banks may hold significant amounts of foreign currency assets, rather than assets in their own national currency, particularly when the national currency is fixed to other currencies.
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Naming of central banks

There is no standard terminology for the name of a central bank, but many countries use the "Bank of Country" form (e.g., Bank of England, Bank of Canada, Bank of Russia). Some are styled "national" banks, such as the National Bank of Ukraine; but the term "national bank" is more often used by privately-owned commercial banks, especially in the United States. In other cases, central banks may incorporate the word "Central" (e.g. European Central Bank, Central Bank of Ireland). Many countries have stateowned banks or other quasi-government entities that have entirely separate functions, such as financing imports and exports.
Interest Rate Interventions

Typically a central bank controls certain types of short-term interest rates. These influence the stock- and bond markets as well as mortgage and other interest rates. The European Central Bank for example announces its interest rate at the meeting of its Governing Council (in the case of the Federal Reserve, the Board of Governors).
Both the Federal Reserve and the ECB are composed of one or more central bodies that are responsible for the main decisions about interest rates and the size and type of open market operations, and several branches to execute its policies. In the
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case of the Fed, they are the local Federal Reserve Banks, for the ECB they are the national central banks.
Policy Instruments
The main monetary policy instruments available to central banks are open market operation, bank reserve requirement, interest rate policy, re-lending and re-discount (including using the term repurchase market), and credit policy (often coordinated with trade policy). While capital adequacy is important, it is defined and regulated by the Bank for International Settlements, and central banks in practice generally do not apply stricter rules. To enable open market operations, a central bank must hold foreign exchange reserves (usually in the form of government bonds) and official gold reserves. It will often have some influence over any official or mandated exchange rates: Some exchange rates are managed, some are market based (free float) and many are somewhere in between ("managed float" or "dirty float").
Interest Rates
By far the most visible and obvious power of many modern central banks is to influence market interest rates; contrary to popular belief, they rarely "set" rates to a fixed number. Although the mechanism differs from country to country, most use a similar mechanism based on a central bank's ability to create as much fiat money as required.
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The mechanism to move the market towards a 'target rate' (whichever specific rate is used) is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target. Central banks may do so by lending money to and borrowing money from (taking deposits from) a limited number of qualified banks, or by purchasing and selling bonds. As an example of how this functions, the Bank of Canada sets a target overnight rate, and a band of plus or minus 0.25%. Qualified banks borrow from each other within this band, but never above or below, because the central bank will always lend to them at the top of the band, and take deposits at the bottom of the band; in principle, the capacity to borrow and lend at the extremes of the band are unlimited. [1] Other central banks use similar mechanisms. It is also notable that the target rates are generally short-term rates. The actual rate that borrowers and lenders receive on the market will depend on (perceived) credit risk, maturity and other factors.
A typical central bank has several interest rates or monetary policy tools it can set to influence markets.
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Marginal Lending Rate (currently 5.00% in the Eurozone) A
fixed rate for institutions to borrow money from the CB.(In the US this is called the Discount rate).
Main Refinancing Rate (4.25% in the Eurozone): This is the
publicly visible interest rate the central bank announces. It is also known as Minimum Bid Rate and serves as a bidding floor for refinancing loans. (In the US this is called the Federal funds rate).
Deposit Rate (3.00% in the Eurozone): The rate parties
receive for deposits at the CB. These rates directly affect the rates in the money market, the market for short-term loans.
Open Market Operations

Through open market operations, a central bank influences the money supply in an economy directly. Each time it buys securities, exchanging money for the security, it raises the money supply. Conversely, selling of securities lowers the money supply. Buying of securities thus amounts to printing new money while lowering supply of the specific security. The main open market operations are: Temporary lending of money for collateral securities
("Reverse Operations" or "repurchase operations", otherwise known as the "repo" market). These operations are carried out on
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a regular basis, where fixed maturity loans (of 1 week and 1 month for the ECB) are auctioned off.
Buying or selling securities ("direct operations") on ad-hoc Foreign exchange operations such as forex swaps. All of these interventions can also influence the foreign
basis.
exchange market and thus the exchange rate.
Capital Requirements
All banks are required to hold a certain percentage of their assets as capital, a rate which may be established by the central bank or the banking supervisor. For international banks, including the 55 member central banks of the Bank for International Settlements, the threshold is 8% (see the Basel Capital Accords) of risk-adjusted assets, whereby certain assets (such as government bonds) are considered to have lower risk and are either partially or fully excluded from total assets for the purposes of calculating capital adequacy. Partly due to concerns about asset inflation and repurchase agreements, capital requirements may be considered more effective than deposit/reserve requirements in preventing indefinite lending: when at the threshold, a bank cannot extend another loan without acquiring further capital on its balance sheet.
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Reserve Requirements
Another significant power that central banks hold is the ability to establish reserve requirements for other banks. By requiring that a percentage of liabilities be held as cash or deposited with the central bank (or other agency), limits are set on the money supply. In practice, many banks are required to hold a percentage of their deposits as reserves. Such legal reserve requirements were introduced in the nineteenth century to reduce the risk of banks overextending themselves and suffering from bank runs, as this could lead to knock-on effects on other banks. As the early 20th century gold standard and late 20th century dollar hegemony evolved, and as banks proliferated and engaged in more complex transactions and were able to profit from dealings globally on a moment's notice, these practices became mandatory, if only to ensure that there was some limit on the ballooning of money supply. Such limits have become harder to enforce. The People's Bank of China retains (and uses) more powers over reserves because the yuan that it manages is a non-convertible currency. Even if reserves were not a legal requirement, prudence would ensure that banks would hold a certain percentage of their assets in the form of cash reserves. It is common to think of commercial banks as passive receivers of deposits from their customers and, for many purposes, this is still an accurate view.
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Exchange Requirements
To influence the money supply, some central banks may require that some or all foreign exchange receipts (generally from exports) be exchanged for the local currency. The rate that is used to purchase local currency may be market-based or arbitrarily set by the bank. This tool is generally used in countries with nonconvertible currencies or partially convertible currencies. The recipient of the local currency may be allowed to freely dispose of the funds, required to hold the funds with the central bank for some period of time, or allowed to use the funds subject to certain restrictions. In other cases, the ability to hold or use the foreign exchange may be otherwise limited. In this method, money supply is increased by the central bank when the central bank purchases the foreign currency by issuing (selling) the local currency. The central bank may subsequently reduce the money supply by various means, including selling bonds or foreign exchange interventions.
Margin Requirements And Other Tools

In some countries, central banks may have other tools that work indirectly to limit lending practices and otherwise restrict or regulate capital markets. For example, a central bank may regulate margin lending, whereby individuals or companies may borrow against pledged securities. The margin requirement establishes a
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minimum ratio of the value of the securities to the amount borrowed. Central banks often have requirements for the quality of assets that may be held by financial institutions; these requirements may act as a limit on the amount of risk and leverage created by the financial system. These requirements may be direct, such as requiring certain assets to bear certain minimum credit ratings, or indirect, by the central bank lending to counterparties only when security of a certain quality is pledged as collateral.
Banking Supervision And Other Activities

In some countries a central bank through its subsidiaries controls and monitors the banking sector. In other countries banking supervision is carried out by a government department such as the UK Treasury, or an independent government agency. It examines the banks' balance sheets and behavior and policies toward consumers. Apart from refinancing, it also provides banks with services such as transfer of funds, bank notes and coins or foreign currency. Thus it is often described as the "bank of banks". Many countries such as the United States will monitor and control the banking sector through different agencies and for different purposes, although there is usually significant cooperation between the agencies.
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Any cartel of banks is particularly closely watched and controlled. Most countries control bank mergers and are wary of concentration in this industry due to the danger of groupthink and runaway lending bubbles based on a single point of failure, the credit culture of the few large banks.
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CENTRAL BANKING IN INDIA RBI
Establishment
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
Preamble
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."
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Central Board
The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.

Appointed/nominated for a period of four years Constitution.
Financial Supervision
The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.
Objective
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.
Constitution
The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board.
Current Focus
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Supervision of financial institutions Consolidated accounting Legal issues in bank frauds Divergence in assessments of non-performing assets and Supervisory rating model for banks
Main Functions Monetary Authority:

Formulates, implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate
flow of credit to productive sectors.
Regulator And Supervisor Of The Financial System:
Prescribes broad parameters of banking operations within Objective: maintain public confidence in the system, protect
which the country's banking and financial system functions.
depositors' interest and provide cost-effective banking services to the public.
Issuer Of Currency:
Issues and exchanges or destroys currency and coins not fit Objective: to give the public adequate quantity of supplies of
for circulation.
currency notes and coins and in good quality.
Functions of Reserve Bank:The Reserve Bank of India Act of 1934 entrust all the
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important functions of a central bank the Reserve Bank of India.
BANK OF ISSUE
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-war period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.
Banker to Government:The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve
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Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.
Bankers' Bank and Lender of the Last Resort:The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India.
The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange.
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Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort.
Controller of Credit:The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank.
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As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.
Custodian of Foreign Reserves:The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. Though there were periods of extreme pressure in favour of or against The rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F
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Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.
Supervisory functions:In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.
Classification of RBIs functions:VES COLLEGE OF ARTS, SCIENCE AND COMMERCE
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The monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country. Equally important, however, are the non-monetary functions of the RBI in the context of India's economic backwardness. The supervisory function of the RBI may be regarded as a nonmonetary function (though many consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licencing of banks, branch expansion, liquidity of their assets, management and methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, Commercial the working have of banks developed has greatly improved. and banks into financially
operationally sound and viable units. The RBI's powers of supervision have now been extended to non-banking financial intermediaries. Since independence, particularly after its nationalisation 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country.
Subsidiaries:VES COLLEGE OF ARTS, SCIENCE AND COMMERCE
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Fully owned: National Housing Bank (NHB), Deposit Insurance and Credit Guarantee Corporation of India(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL) Majority stake: National Bank for Agriculture and Rural Development (NABARD) The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India.
TYPES OF BANKS
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RESERVE RESERVE BANK BANKOF OF INDIA INDIA
COMMERCCOMMERCIAL IALBANKS BANKS
COCOOPERATIVE OPERATIVE BANKS BANKS STATE STATE LAND LANDDEVE DEVE CO-OP. CO-OP. BANK BANK DEVLOPME DEVLOPME NT NT CENTRAL CENTRAL LAND LANDCOCOOPERATIVE OPERATIVE
PUBLIC PUBLIC BANK BANK
PRIVATE PRIVATE BANK BANK
STATE STATECOCOOPERATIVE OPERATIVE BANK BANK
SCHEDULE SCHEDULE BANKS BANKS
SCHEDULE SCHEDULE BANKS BANKS
CENTRAL CENTRAL COCOOPERATIVE OPERATIVE
NON NON SCHEDULE SCHEDULE BANKS BANKS
NON NON SCHEDULE SCHEDULE BANKS BANKS
PRIMARY PRIMARY AGRICULTU AGRICULTU RE RECREDIT CREDIT SOCIETY SOCIETY
FARMER FARMER SERVICES SERVICES SOCIETY SOCIETY
PRIMARY PRIMARY URBAN URBANCOCOOPERATIVE OPERATIVE
COMMERCIAL BANKS
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Introduction
Commercial bank plays an important role in directing the affairs of the economy in various ways as a matter of fact the operation of commercial banks record the economic pulse of the country. In 19th century economist David Ricardo had stated that a bank was a dealer or transactor in money. Banks are thus financial intermediaries collecting deposits and loans. But now they are not only the purveyors of money but also the creator or manufacturer of money in a financial system. It is the banks who set the temps of aggregate activity in any economy. Commercial banks are the financial institution dealing with others money. Though it was meant for receiving deposits and granting loans, but in the present day world they play a varieties of roles and contribute a lot to the financial sector. Banking has a major share in the world finance industry. Commercial banks play a significant role in countrys financial market. Opening policies adopted by the countries of the world have given opportunities to the commercial banks to operate globally in an environment of ore competition. Commercial banks can be simply defined as the institution dealing with others money.
Meaning of commercial bank

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A commercial bank is a type of financial intermediary and a type of bank. It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings and time (or term) deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds. A modern commercial bank reforms many reform. It renders many services to its customers and to the public. Scheduled commercial banks & non scheduled banks banking regulation act of India, 1949 defines banking as accepting, for the purpose of lending or investments of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft and other or otherwise.
Developments in Commercial Banking
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This provides a detailed account of the various policy measures undertaken by the Reserve Bank during 2005-06 and some major developments up to October 31, 2006. These relate to monetary policy, credit delivery, regulation and supervision, customer service, financial inclusion, payments and settlement systems, technological developments and legal reforms. The objective of various policy measures has been to ensure an efficient and stable financial system for sustaining the growth momentum, and to expand banking services to all sections of society. Major policy initiatives undertaken by the Reserve Bank include allowing banks to raise capital through innovative instruments, advising banks to open no frills accounts with nil or low balances, one-time settlement scheme for SME accounts, guidelines on securitisation of standard assets and sale/purchase of NPAs, and introduction of the national electronic funds transfer (NEFT) system.
Operations and Performance of Commercial Banks

This defines the operations and financial performance of scheduled commercial banks, at the aggregate and bank group levels, based on their audited balance sheets. The analysis in this Chapter covers important aspects such as trends in overall bank credit, credit to the priority sector, lending to sensitive sectors, investment portfolio, trends in deposits, structure of interest rates, financial performance and soundness parameters, extent of technology application and regional spread of scheduled commercial banks. The Chapter also covers the operations of
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scheduled commercial banks in the capital market. An analysis of the balance sheet parameters and financial performance of regional rural banks is presented. Finally, the financial performance of the four local area banks is also covered. The main points emerging from the analysis are: Bank credit growth remained robust for the second year in succession. Credit growth turned more broad-based even as credit expansion was more pronounced in respect of retail sector, particularly housing and loans to commercial real estate. Net accretion to deposits was lower than expansion in credit, with banks having to partially unwind their holdings of Government securities. Net profits of scheduled commercial banks, as a group, increased during the year as against the decline in the previous year due mainly to a turnaround in non-interest income. Gross NPAs and net NPAs declined significantly during the year and are now comparable with global levels. Banks' capital to risk weighted assets ratio remained more or less at the previous year's level, despite application of capital charge for market risk; significant increase in risk-weighted assets and increase in risk-weights for certain sensitive sectors. This, to an extent, was facilitated by large resources raised by banks from the capital market. Till October 31, 2006, 137 RRBs were consolidated to form 43 new RRBs, sponsored by 18 banks in 15 States, bringing down
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the total number of RRBs all over India from 196 at end-March 2005 to 102.
CO-OPERATIVE BANK
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INTRODUCTION
The co-operative banks have a history of almost 100 years. The co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfill, their number, and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, and their business in the urban areas has increased phenomenally in recent years mainly due to the sharp increase in the numbers of primary co operative. Co-operative banks play an important role in the Indian Financial System, especially at the village level. The growth of cooperative movement commenced with the passing of the act of 1904, which officially launched this movement in India. The act provided an easy legal framework for their formation as well as governance by making the co-operative banks free from the complicated provisions of the Indian Companies Act. While the co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery, personal finance etc along with some small scale industries and self employment driven activities.
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The co-operative banks in urban areas mainly finance various categories of people for self employment, industries, small-scale units, home finance, consumer finance, personal finance etc. Some of the co-operative banks are quite forward looking and have developed sufficient core competencies to challenge state and private sector banks. According to NAFCUB the total deposits & lendings of Cooperative Banks in much ore than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Cooperative Banks is attributed mainly to their much better local reach, personal interaction with customers, and their ability to catch the nerve of the local clientele. Though registered under the Co-Operative Societies Act of the Respective States (where formed originally) the banking related activities of the co-operative banks area also regulated by the reserve bank of India. They are governed by the Banking Regulations Act 1949 And Banking Laws (Co-Operative Societies) Act, 1965
STRUCTURE OF CO-OPERATIVE BANK

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CO-OPERATIVE CO-OPERATIVE BANK BANK INSTITUTION INSTITUTION
URBAN URBANCOCOOPERATIVE OPERATIVEBANK BANK
RURAL RURALCOCOOPERATIVE OPERATIVEBANK BANK
SCHEDULED SCHEDULED U.C.BANK U.C.BANK
NONNON-SCHEDULED SCHEDULED U.C.BANK U.C.BANK
SHORT SHORT--TERM TERM
LONG LONG--TERM TERM
MUTLI MUTLISTATE STATE
STATE STATECOCOOPERTIVE OPERTIVEBANK BANK
SINGLE SINGLESTATE STATE
DISTRICT DISTRICTCOCOOPERATIVE OPERATIVEBANK BANK
PRIMARY PRIMARY AGICULTURE AGICULTURECOCOOPERATIVE OPERATIVEBANK BANK
Developments in Co-operative Banking

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The outlines major policy initiatives, and operations and performance of various segments of the co-operative credit institutions in India, i.e., urban co-operative banks (UCBs) and rural co-operative credit institutions. The data coverage for UCBs has been widened to include complete balance sheet information in respect of both scheduled and non-scheduled UCBs. Besides, the analysis also covers non-scheduled UCBs with deposit size of Rs.100 crore and above. The Chapter also covers, for the first time, information on balance sheet, financial performance and asset quality of State Co-operative Agriculture and Rural Development Banks (SCARDBs) and Primary Co-operative Agriculture and Rural Development Banks (PCARDBs). The policy initiatives for UCBs during 2005-06 were guided by the Vision Document for revival of UCBs. Eight States have entered into Memoranda of Understanding with the Reserve Bank so far. As envisaged in the Vision Document a differentiated approach to regulation has been adopted with regulatory forbearance for the smaller UCBs while at the same time strengthening their operations. Regulatory measures undertaken during the year related to improving credit delivery mechanism, strengthening prudential norms, improving customer service and enhancing business opportunities. The major points emerging from the analysis of balance sheet, financial performance and soundness indicators in this Chapter are as follows: Assets of urban co-operative banks (both scheduled and non-scheduled) increased moderately during 2005-06.
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Total assets of scheduled urban co-operative banks
increased at a higher rate during 2005-06 in comparison with 2004-05. 06. All segments of the rural co-operative sector were able to expand their business operations during 2004-05. However, their financial performance varied across the institutions. Within the short-term structure, while the state co-operative banks (StCBs) earned lower profits, the district central cooperative banks (DCCBs) recorded higher profits. Primary agricultural credit societies (PACS), on the whole, continued to incur overall losses, although a sizable number of them earned profit during 2004-05. In the case of long-term structure, while the SCARDBs continued to incur losses, PCARDBs staged a turnaround during 2004-05. Asset quality of short-term structure of rural co-operative banks including StCBs, DCCBs and PACS improved, while that of long-term institutions including SCARDBs and PCARDBs declined. The SHG-Bank linkage programme continued with 0.6 million new SHGs having been credit linked by the banking system during 2005-06, benefiting over 32.9 million poor families at endMarch 2006. Net profits of scheduled UCBs more than doubled during Asset quality of UCBs improved significantly during 20052005-06 in contrast to a decline in the previous year.
Regulatory Environment
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The urban co-operative banks are regulated and supervised by State Registrars of Co-operative Societies, Central Registrar of Co-operative Societies in case of Multi-state co-operative banks and by Reserve Bank. The Registrars of Co-operative Societies of the States exercise powers under the respective Co-operative Societies Act of the States in regard to incorporation, registration, management, amalgamation, reconstruction or liquidation. In case of the urban co-operative banks having multi-state presence, the Central Registrar of Co-operative Societies, New Delhi, exercises such powers. The banking related functions, such as issue of license to start new banks / branches, matters relating to interest rates, loan policies, investments, prudential exposure norms etc. are regulated and supervised by the Reserve Bank of India under the provisions of the Banking Regulation Act, 1949(AACS).
Main functions of commercial bnaks as well as cooperative bank

The borrowings, raising or taking of deposits of money. The lending or advancing on money either upon or without security. The drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts and other instruments and other instruments and securities, whether transferable or negotiable or not.
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The granting and issuing of letter of credit, travelers cheque and circular notes. The buying selling in billion and species. The buying and selling of foreign exchange including foreign banks notes. The acquiring holding issuing of commission, underwriting and dealing in stock, funds, shares and debentures, debentures stocks, bonds obligations, securities and investment of all kinds. The purchasing and selling of bonds and scripts or other forms of securities on behalf of constituents or others. The receiving of all kinds of bonds, scripts or valuable on deposit or for safe custody or otherwise. The providing of safe deposit vaults for custody of valuables of customers and the collecting and transporting of money and securities.
RELATIONSHIP
BETWEEN
THE
COMMERCIAL
BANKS AND CO-OPERATIVE BANKS

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In any type of economic system whether it is capitalism or socialism, the banking sector is fundamentally very important. The commercial banks, co-operative banks are the constituents of the banking sector. Due to their support the different sectors get strength. These banks do functioning of providing finance under the control of the Central Bank. The functioning of commercial banks and c0-operative banks is almost similar i.e. to accept deposits, to provide credit facilities, to make use of cheques and other negotiable instruments in transactions, to provide safe deposit vault system, so the relationship between the two is close. In India the relative progress of commercial banks in comparison to co-operative banks is very slow. Commercial Banks seem competing with co-operative banks. This competition is in respect of branch expansion and facilities of credit supply. However after nationalization, no difference is found in the working of commercial banks. The trend to compare with co-operative banks is changed now. Today, commercial banks do not give much attention to bank expansion. It resulted into the growth of cooperative banks. Co-operative credit societies have certain image in the minds o the rural people. Co-operative banks have some more freedom than commercial banks in their functioning.
DIFFERNCE BETWEEN CO-OPERATIVE BANKS COMMERCIAL BANKS AND PUBLIC SECTOR BANKS
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A.) Co-operative banks and commercial banks:

Co-operative banks have objective of fulfilling the needs of their members, deposit holders. Especially these banks fulfill the needs of short term, medium - term and long term loans. They have social benefit outlook. On the contrary, commercial banks have profit motivation through more and more supply of credit. Cooperative banks do not have main objective of profit making. They aim at developing agriculture and other allied occupations to agriculture. They try to provide maximum credit with minimum cost to their members. On the other hand, loans from commercial banks create more expenditure. The commercial banks and co-operative banks have difference in case of administration and management. The board of members of co-operative banks supervises and control the day to day working of co-operative banks. This board includes representatives of primary committee, representatives appointed by the government. The management of co-operative banks varies according to organizational structure. The management is in the hands of Board of Directors which consists of 7 to 10 members. Out of these 2 or 3 directors are appointed by the government. One director in the Board of Directors in case of the primary land development bank is at appointed by the central land development bank. The management and working of commercial banks is according to the act of nationalized banks. The working of co47
operative banks is according to the co-operative law. The government and the members of the bank indirectly control the working of co-operative banks.
B.) Co-operative banks and public sector banks:

The difference between the co-operative banks and public sector banks is as follows: 1) The creation of co-operative banks is for providing credit to industry rum on co-operative basis. The creation of public sector banks is for providing credit to industry and commercial trade. 2) The object of co-operative banks is not to make profit by providing credit. The object of these banks is to promote social benefit to maximum level. The public sector banks do the function of credit expansion to various sectors with the objective of accruing more and more profit. 3) The share capital and so credit expansion of co-operative is limited. The share capital of public sector banks is unlimited and so their credit expansion is on a large scale.
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4)
The banking regulation act of 1949 was not applicable to co-operative banking upto 1966. This act was applicable to public sector banks since beginning.
5) The government has partial control on co-operative banks. The public sector banks are under felly control of the central government. 6) The elected board of members of co-operative banks
keeps supervision on day to day working of these banks. The administration and management of public sector banks is according to the act of public sector banking. 7) There are certain limits on the branch expansion of co-operative banks. The public sector banks can expand their branches to any limit. 8) As the co-operative banks are partially private, they can give better treatment to members, depositors and borrowers. The public sector banks belong to the government, so the administrative functioning of these banks is not so much satisfactory.
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BANKING REGULATION ACT, 1949
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ORIGIN OF BANKING
Since the banking activities were started in different periods in different countries there is no unanimous view regarding the origin of the word bank. The word Bank is said to have derived from the French word banco or bancus or banc or banque which means a bench. In fact the early jews in Lombardly transacted their banking business by sitting on benches. When their business failed, the benches were broken and hence the word bankrupt came into vogue. Another common held view is that the word bank might be original from the German word back which means a joint stock fund. Of course a bank essentially deals with funds .In due course it was Italiansied into banco Franchised into bank and finally Angliesed into bank. This view is most prevalent even today. A Banker who is doing the banking business is called a banker. But it is not at all easy to define the term banker precisely because a banker performs multifarious functions.
ORIGIN OF THE ACT
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Banks are public service institution dealing with funds of the public. Unlike joint stock companies which obtain the required capital from the shareholders, banks obtain a very large proportion of their working capital from the public in the form of deposits. Hence in the national interest, there is a need to regulate the working of banks by a separate Act. Unfortunately in India there was no separate legislation for Banking till 1949 and so banks were brought under the control of the Indian Companies Act. Though the Central Banking Enquiry Committee recommended the need for a separate legislation, it was not given due consideration then. However subsequent development like mushroom growth of banks with inadequate capital, dishonest management, speculative investment, appointment of incompetent directors for long periods with high salaries, poor liquidity of funds etc, necessitated the passing of a separate Act for Banking Companies. Accordingly, a bill was introduced in March 1948 and was passed in the Parliament in February 1949.It came into force from 16 th of March 1949.This act was originally called the Banking Companies Act 1949 and now it is renamed as the Banking Regulation Act.
DEFINATION ON BANKING:-.
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The business of banking has been defined in section5 (b) of the act as follows: Accepting for the purpose of lending or investment of deposit, of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise. Again section 5(c) defines Banking Company as any company which transacts the business of banking in India.
Banking Regulations For Commercial Banks:53
Prohibition of trading: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 realization 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
Prohibition of employment of managing agents and restrictions on certain forms of employment:No banking company Shall employ or be managed by a managing agent or Shall employ or continue the employment of any person Who is, or at any time has been, adjudicated insolvent, or has suspended payment or has compounded with his creditors, or who is, or has been, convicted by a criminal court of an offence involving moral turpitude or Whose remuneration or part of whose remuneration takes the form of commission or of a share in the profits of the company.
Requirement as to minimum paid-up capital and reserves:VES COLLEGE OF ARTS, SCIENCE AND COMMERCE
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No banking company in existence on the commencement of this Act, shall, after the expiry of three years from such commencement or of such further period not exceeding one year as the Reserve Bank, having regard to the interests of the depositors of the company, may think fit in any particular case to allow, carry on business and no other banking company shall after the commencement of this Act, commence or carry on business in India, unless it complies with such of the requirements of this section as are applicable to it In the case of a banking company incorporated outside India:(a) The aggregate value of its paid-up capital and reserves shall not be less than fifteen lakhs of rupees and if it has a place or places of business in the city of Bombay or Calcutta or both, twenty lakhs of rupees. (b) The banking company shall deposit and keep deposited with the Reserve Bank either in cash or in the form of unencumbered approved securities, or partly in cash and partly in the form of such securities:(i) An amount which shall not be less than the minimum required. (ii) As soon as may be after the expiration of each year, an amount calculated at twenty per cent of its profit for that year in respect of all business transacted through its branches in India, as disclosed in the profit and loss account prepared with reference to that year.
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Regulation of paid-up capital, subscribed capital and authorised capital and voting rights of shareholders:No banking company shall carry on business in India, unless it satisfies the following conditions, namely: (i) That the subscribed capital of the company is not less than onehalf of the authorised capital, and the paid-up capital is not less than one-half of the subscribed capital and that, if the capital is increased, it complies with the conditions prescribed in this clause within such period not exceeding two years as the Reserve Bank may allow. (ii) That the capital of the company consists of ordinary shares only or of ordinary shares or equity shares and such preferential shares as may have been issued prior to the 1st day of July, 1944:
Restriction on commission, brokerage, discount, etc. on sale of shares: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 paid-up value of the said shares.
Reserve Fund:Every banking company incorporated in India shall create a reserve fund and shall, out of the balance of profit of each year as disclosed in the profit and loss account prepared under section 29
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and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such profit. The Central Government may, on the recommendation of the Reserve Bank and having regard to the adequacy of the paid-up capital and reserves of a banking company in relation to its deposit liabilities, declare by order in writing that the provisions of subsection (1) shall not apply to the banking company for such period as may be specified in the order.
Cash reserve:Every banking company, not being a scheduled bank, shall maintain in India by way of cash reserve with itself or by way of balance in a current account with the Reserve Bank, or by way of net balance in current accounts or in one or more of the aforesaid ways, a sum equivalent to at least three per cent of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight and shall submit to the Reserve Bank before the twentieth day of every month a return showing the amount so held on alternate Fridays during a month with particulars of its demand and time liabilities in India on such Fridays or if any such Friday is a public holiday.
Restrictions on loans and advances:No banking company shall grant any loans or advances on the security of its own shares, or enter into any commitment for granting any loan or advance to or on behalf of
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(i) Any of its directors, (ii) Any firm in which any of its directors is interested as partner, manager, employee or guarantor, or (iii) Any company [not being a subsidiary of the banking company or a company registered under section 25 of the Companies Act, 1956 (1 of 1956), or a Government company] of which 61[or the subsidiary or the holding company of which] any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or (iv) Any individual in respect of whom any of its directors is a partner or guarantor. Where any loan or advance granted by a banking company is such that a commitment for granting it could not have been made if had been in force on the date on which the loan or advance was made, or is granted by a banking company after the commencement, but in pursuance of a commitment entered into before such commencement, steps shall be taken to recover the amounts due to the banking company on account of the loan, or advance together with interest, if any, due thereon within the period stipulated at the time of the grant of the loan or advance, or where no such period has been stipulated, before the expiry of one year from the commencement.
Lending Limits
Lending limit regulations restrict the total amount of loans and credits that a bank may extend to a single borrower. This restriction is usually stated as a percentage of the bank's capital or
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assets. For example, a national bank generally must limit its total outstanding loans and credits to any single borrower to no more than 15% of the bank's total capital and surplus. Some state banking regulations also contain similar lending limits applicable to state-chartered banks. Both federal and state laws generally allow for a higher lending limit, up to 25% of capital and surplus for national banks, when the portion of the credit that exceed the initial lending limit is fully secured.
Restrictions on opening of new, and transfer of existing, places of business: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. No banking company incorporated in India shall open a new place of business outside India or change, otherwise than within the same city, town or village in any country or area outside India, the location of an existing place of business situated in that country or area. Before granting any permission under this section, the Reserve Bank may require to be satisfied by an inspection or otherwise as to the financial condition and history of the company, the general character of its management, the adequacy of its capital structure and earning prospects and that public interest will be served by the opening or, as the case may be, change of location, of the place of business.
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The Reserve Bank may grant permission to such conditions as it may think fit to impose either generally or with reference to any particular case. Where, in the opinion of the Reserve Bank, a banking company has, at any time, failed to comply with any of the conditions imposed on it under this section, the Reserve Bank may, by order in writing and after affording reasonable opportunity to the banking company for showing cause against the action proposed to be taken against it, revoke any permission granted.
Accounts and balance-sheet:At the expiration of each calendar year or at the expiration of a period of twelve months ending with such date, as the Central Government may, by notification in the Official Gazette, specify that every banking company incorporated in India, in respect of all business transacted by it, and every banking company incorporated outside India, in respect of all business transacted through its branches in India, shall prepare with reference to that year or period, as the case may be, a balance-sheet and profit and loss account as on the last working day of that year or the period, as the case may be in the Forms set out in the Third Schedule or as near thereto as circumstances admit. The balance-sheet and profit and loss account shall be signed:-
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(a) In the case of a banking company incorporated in India, by the manager or the principal officer of the company and where there are more than three directors of the company, by at least three of those directors, or where there are not more than three directors, by all the directors, and (b)In the case of banking company incorporated outside India by the manager or agent of the principal office of the company in India. The balance-sheet of a banking company is to be prepared in a form other than the form set out in Part I -of Schedule VI to the Companies Act, 1956 the requirements of that relating to the balance-sheet and profit and loss account of a company shall, in so far as they are not inconsistent with this Act, apply to the balance-sheet or profit and loss account, as the case may be, of a banking company. The contrary contained of the Companies Act, 1956 the period to which the profit and loss account relates shall, in the case of a banking company, be the period ending with the last working day of the year immediately preceding the year in which the annual general meeting is held.
Power of the Reserve Bank to give directions:Where the Reserve Bank is satisfied that (a) In the public interest or in the interest of banking policy.
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(b) 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. (c) To secure the proper management of any banking company generally, It is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued, and in so modifying or canceling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.
Certain provisions of the Act not to apply to certain banking companies:The provisions shall not apply to a banking company to (a) Which, whether before or after the commencement of the Banking Companies (Amendment) Act, 1959 has been refused a licence, or prohibited from accepting fresh deposits by a
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compromise, arrangement or scheme sanctioned by a court or by any order made in any proceeding relating to such compromise, arrangement or scheme, or prohibited from accepting deposits by virtue of any alteration made in its memorandum. (b) Whose licence has been cancelled, whether before or after the commencement of the Banking Companies (Amendment) Act, 1959. Where the Reserve Bank is satisfied that any such banking company as is referred to repay, or has made adequate provision for repaying all deposits accepted by the banking company, either in full or to the maximum extent possible, the Reserve Bank may, by notice published in the Official Gazette, notify that the banking company has ceased to be a banking company within the meaning of this Act, and thereupon all the provisions of this Act applicable to such banking company shall cease to apply to it, except as respects things done or omitted to be done before such notice.
Reimbursement to Deposit Insurance Corporation by liquidator or transferee bank:Where a multi-State co-operative bank, being an insured bank within the meaning of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, is wound up and the Deposit Insurance Corporation has become liable to the depositors' of the insured bank, the Deposit Insurance Corporation shall be
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reimbursed by the liquidator or such other person in the circumstances, to the extent and in the manner provided.
Punishments for certain activities in relation to banking companies:No person shall (a) Obstruct any person from lawfully entering or leaving any office or place of business of a banking company or from carrying on any business there, or (b) Hold, within the office or place of business of any banking company, any demonstration which is violent or which prevents, or is calculated to prevent, the transaction of normal business by the banking company, or (c) Act in any manner calculated to undermine the confidence of the depositors in the banking company. Whoever contravenes any provision without any reasonable excuse shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both.
Banking Regulations for Co-operative Banks:Act to override bye-laws, etc:The provisions of this Act shall have effect, notwithstanding anything to the contrary contained in the bye-laws of a cooperative society, or in any agreement executed by it, or in any resolution passed by it in general meeting, or by its Board of
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Directors or other body entrusted with the management of its affairs, whether the same be registered, executed or passed; as the case may be before or after the commencement of the Banking Laws. Any provision contained in the bye-laws, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be." (i) The words, "but excluding the business of a managing agent or secretary and treasurer of company" shall be omitted; (ii) After the word "company", the words "co-operative society" shall be inserted; (iii) After the word "company", the words "or co-operative society" shall be inserted
Use of words "bank", "banker" or "banking" :No co-operative society other than a co-operative bank shall use as part of its name or in connection with its business any of the words "bank", "banker" or "banking", and no co-operative society shall carry on the business of banking in India unless it uses as part of its name at least of such words. Nothing in this section apply to:(a) A primary credit society, or (b) A co-operative society formed for the protection of the mutual interest of co-operative banks or co-operative land mortgage banks, or
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(c) Any co-operative society, not being a primary credit society, formed by the employees of (i) A banking company or the State Bank of India or a corresponding new bank or a subsidiary bank of such banking company, State Bank of India or a corresponding new bank, or (ii) A co-operative bank or a primary credit society or a cooperative land mortgage bank, insofar as the word "bank", "banker" or "banking" appears as part of the name of the employer bank, or as the case may be, of the bank whose subsidiary the employer bank is."
Requirement as to minimum paid-up capital and reserves:Any law relating to co-operative societies for the time being in force, no co-operative bank shall commence or carry on the business of banking in India unless the aggregate value of its paidup capital and reserves is not less than one lakh of rupees. (a) Any such bank which is carrying on such business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 for a period of three years from such commencement. (b) To a primary credit society which becomes a primary cooperative bank after such commencement, for a period of two years from the date it so becomes a primary co-operative bank or for such further period not exceeding one year, the Reserve Bank, having regard to the interests of the depositors of the primary cooperative bank, may think fit in any particular case to allow.
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For the purpose of this section, "value" means the real or exchangeable value and not the nominal value which may be shown in the books of the co-operative bank concerned. If any dispute arises in computing the aggregate value of the paid-up capital and reserves of any co-operative bank, a determination thereof by the Reserve Bank shall be final for the purposes of this section.
Cash reserve:Every co-operative bank, not being a State cooperative bank for the time being included in the Second Schedule to the Reserve Bank of India Act, 1934 (hereinafter referred to as a "scheduled State Co-operative Bank"), shall maintain in India by way of cash reserve with itself or by way of balance in a current account with the Reserve Bank or the State co-operative bank of the State concerned or by way of net balance in current accounts, or, in the case of a primary co-operative bank, with the central cooperative bank of the district concerned, or in one or more of the aforesaid ways, a sum equivalent to at least three per cent of the total of its demand and time liabilities in India, as on the last Friday of the second preceding fortnight and shall submit to the Reserve Bank before the fifteenth day of every month a return showing the amount so held on alternate Fridays during a month with particulars of its demand and time liabilities in India on such Fridays or if any such Friday is a public holiday under the Negotiable Instruments Act.
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Restriction on holding shares in other co-operative societies:No co-operative bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf. (i) Shares acquired through funds provided by the State Government for that purpose; (ii) In the case of a Central co-operative bank, the holding of shares in the State co-operative bank to which it is affiliated; (iii) In the case of a primary co-operative bank, the holding of shares in the Central co-operative bank to which it is affiliated or in the State cooperative bank of the State in which it is registered
Restrictions on loans and advances:No co-operative bank shall:(a) Make any loans or advances on the security of its own shares. (b) Grant unsecured loans or advances (i) To any of its directors. (ii) To firms or private companies in which any of its directors is interested as partner of managing agent or guarantor or to individuals in cases where any of its directors is a guarantor; or (iii) To any company in which the chairman of the Board of directors of the co-operative bank (where the appointment of a chairman is for a fixed term) is interested as its managing agent, or where there is no managing agent, as its chairman or managing director.
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Accounts and Balance Sheet:At the expiration of each year ending with the 30th days of June, or at the expiration of a period of twelve months ending with such date as the Central Government may, by notification in the Official Gazette, specify in this behalf every co-operative bank, in respect of all business transacted by it, shall prepare with reference to that year or the period a balance sheet and profit and loss account as on the last working day of the year or the period in the Forms set out in the Third Schedule as near there to as circumstances admit:
Reimbursement to the Deposit Insurance Corporation by liquidator or transferee bank:Where a multi-State co-operative bank, being an insured bank within the meaning of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, is wound up and the Deposit Insurance Corporation has become liable to the depositors of the insured bank, the Deposit Insurance Corporation shall be reimbursed by the liquidator or such other person in the circumstances, to the extent and in the manner.
Order of winding up multi-State co-operative bank to be final in certain cases:Where a multi-State co-operative bank, being an eligible cooperative bank, has been registered under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 as an insured bank, and subsequently
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(a) In pursuance of a scheme prepared with the previous approval of the Reserve Bank under section 18 of the Multi-State Cooperative Societies Act, 2002, an order sanctioning a scheme of compromise and arrangement or reorganization or reconstruction has been made. (b) On requisition by the Reserve Bank, an order for winding up of the multi-State co-operative bank has been made under of MultiState Co-operative Societies Act, 2002. (c) An order for the super session of the Board and the appointment of an Administrator therefore has been made for sanctioning the scheme of compromise and arrangement or reorganisation or reconstruction or the winding up of the multiState co-operative bank under clause or an order for the super session of the Board and the appointment of an Administrator or shall not be liable to be called in question in any manner.
Validation of licenses granted by Reserve Bank to multi state co-operative societies:(a) No licence, granted to a multi-State co-operative society by the Reserve Bank, which was subsisting on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004, shall be invalid or be deemed ever to have been invalid merely by the reason of such judgment, decree or order
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(b) Every licence, granted to a multi-State co-operative society by the Reserve Bank, which was subsisting on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004, shall be valid and be deemed always to have been validly granted in accordance with law (c) A multi-State co-operative society whose application for grant of licence for carrying on banking business was pending with the Reserve Bank on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 shall be eligible to carry on banking business until it is granted a licence in pursuance or by a notice in writing notified by the Reserve Bank that the licence cannot be granted to it"
Power to exempt:Without prejudice to the provisions of, the Reserve Bank may, by notification in the Official Gazette, declare that, for such period and subject to such conditions as may be specified in such notification the whole or any part of the provisions, as may be specified therein, shall not apply to any co-operative bank or class of co-operative banks, with reference to all or any of the offices of such co-operative bank or banks, or with reference to the whole or
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any part of the assets and liabilities of such co-operative bank or banks."
CONCLUSION
The reserve bank of India is Indias central bank. Reserve bank is a regulation of banks but is also the dominant owner of the largest commercial banks. With globalization and impact of technology, several new challenges are likely to emerge for the fraternity of central banks. The RBI has blamed the commercial banks,
72
charging them with negligence and extensive, violation of banking of banking regulation. The commercial banks are in turn blaming the RBI for inefficient functioning and ineffective supervision. The banking system has three tiers. These are the scheduled commercial banks, the regional rural banks which operate in rural areas not covered by the scheduled banks and the co-operative banks and special purpose rural banks. The RBI lays down restriction on bank lending and other activities with large companies. These restriction known as consortium guidelines seem to have outlined their usefulness. All commercial banks face stiff competition and restrictions on the use of both their assets and liabilities. 40% of loans must be directed to priority sector and high liquidity ratio and cash reserve requirements severely limit the availability of deposits for lending. The co-operative banking system has witnessed phenomenal growth during the last one and half decades. The role of RBI thus is to frame a regulatory and supervisory regime that is multi layered to capture the heterogeneity of the sector and implement policies that would provide adequate elbowroom for the sector to grow in a non disruptive manner. Despite the importance of co-operative banks in the Indian economy, of late there has been a huge debate concerning the regulation of these banks. These concerns have been trigged by a spate of failures that have been attributed to mismanagement and frauds. This takes us to the central question of what are the problems that plague this sector and what could be the possible remedies. Commercial banks remain the key players. More ever the central bank is most developing countries is relatively well placed for funding, is a centre of technical
73
excellence and can maintain greater independence from the lobbying of commercial and political interests on behalf of certain favoured institutions.
RECOMMENDATIONS / SUGGESTIONS
The role of the bank as regulator of banking sector is mainly by virtue of the provisions of the Banking Regulation Act, 1949. As provided in Section 6 of the banking regulation act, banks may undertake certain non banking business in addition to the
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business of banking. In that regard banks be subject to the regulatory control of other agencies also. Being in the business of banking, cooperative credit societies, including the State- and district-level cooperative banks, have to follow the principles of banking in their functioning. The present structure of the State Cooperative Societies Act with the e Registrar at its head, presiding over the destiny of the cooperatives, is totally unsuitable for the cooperatives to operate on sound prudential banking norms. The banking institutions being governed by such archaic rules and regulations is an anachronism in the present climate of economic liberalisation. It is necessary that bank-related functions of the cooperative banks be brought full under the purview of Banking Regulation Act, 1949 in line with the existing provisions of the BR Act as applicable to banking companies -- commercial banks registered under the Companies Act. The provisions of the BR Act should override the provisions of the State Acts/bye-laws/rules which run counter to it. This will lead to a clear demarcation of the a activities of cooperative banks which fall under the domain of RBI vis--vis the RCS.' This should be made possible by bringing all cooperative societies which are in the banking business under one umbrella through a central legislative by strengthening and amending the BR Act 1949. The cooperatives should be allowed the freedom to conduct their affairs as enjoyed by other forms of enterprises. The Act should lay down a simple procedure for registration, amendment to bye-laws, change
75
of
liability,
division,
amalgamation, merger and dissolution of a cooperative banking institution. The conduct of election, audits, and so on, should be specified by their bye-laws and decided by their own members/general bodies as is case with other corporate entities . However, this will be meaningful only when the cooperative banks have the similar system and freedom of operations as the commercial banks. As long as they are extended arms of State governments, this will not be possible. It is, therefore, appropriate t hat the RBI Governor has set the ball rolling for reforms in the cooperative banking sector. Firstly, it would be a very good beginning if cooperative banks were brought under the purview of a single regulator. This would help in detection and pre-emptive action to prevent misallocation of resources. Also, placing the burden of monitoring on a single entity would attenuate the blame game in case of failure due to lack of supervision. While a single regulator would be ideal, if dual regulation were to persist, clear demarcation of duties must be specified.
Another problem that plagues cooperative banks is the involvement of politicians in their functioning. It is commonly argued that politicians use cooperative banks to allocate favours to extract political rents. This makes banks weak as they are used to allocate loans in exchange for political favours. The interference of politicians also creates hurdles for regulators in implementing corrective measures in mismanaged banks.
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Another aspect that raises inefficiencies in cooperative banks is the lack of professional management. Most often cooperative banks are run like any other family business with the involvement of friends and relatives. The lack of professional management and the involvement of family in the running of banks also leads to related lending. While the RBI has issued directives requiring adequate representation of professionals on the boards of cooperative banks, implementation of this policy remains questionable. The RBI or the federation of cooperative banks could also make it mandatory for managers and the staff of cooperative banks to receive certification based on their functions. (1) Improve the transparency of information and in turn use depositors effectively as a market discipline tool. (2) Address the issue of dual regulation by ideally allocating regulatory authority to a single regulator or clearly specify the regulatory domains and responsibilities. (3) Minimise political interference. (4) Improve management expertise. In conclusion, cooperative banks act as a very important channel for credit allocation to the small borrowers. Thus, improving their functioning through a better regulatory structure can provide further impetus to economic growth and poverty alleviation.
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BIBLOGRAPHY BOOKS
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CO-OPERATIVE BANKING -R. NARAYAN -A. T. VAZE CENTRAL BANKING IN INDIA -K. GOVINDA BHAT COMMERCIAL BANKS IN INDIA -KUNJUKUNJ SEARCH ENGINE www.google.com www.yahoo.com www.rbi.org.in www.wikipedia.com
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RBI REGULATORY MEASURES FOR COMMERCIAL BANKS AND CO-OPERATIVE BANK

BACHELOR OF COMMERCE BANKING & INSURANCE SEMESTER V

SHIVANAND .S. MALED

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

_____________________________ of B.Com Banking &

under the guidance of

Project Guide/ Internal Examiner

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

SHIVANAND .S. MALED Roll No. 28

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

RBI REGULATORY MEASURES FOR COMMERCIAL BANKS AND CO-OPERATIVE BANK

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

RBI REGULATORY MEASURES FOR COMMERCIAL BANKS AND CO-OPERATIVE BANK

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

INTRODUCTION TO CENTRAL BANKING

Activities and responsibilities

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

and the Government's stock register;

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

The ECB building in Frankfurt

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

Naming of central banks

Interest Rate Interventions

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

Marginal Lending Rate (currently 5.00% in the Eurozone) A

Main Refinancing Rate (4.25% in the Eurozone): This is the

Deposit Rate (3.00% in the Eurozone): The rate parties

Open Market Operations

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

exchange market and thus the exchange rate.

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

Margin Requirements And Other Tools

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

Banking Supervision And Other Activities

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

CENTRAL BANKING IN INDIA RBI

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE