213F Principles of Banking Laws

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FOUNDATION COURSE
213 F PRINCIPLES OF BANKING LAWS
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Refer (not in any particular order) :
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CONTENTS
213 F Principles Of Banking Laws
Module-1) Origin and Development of Banking System :
Module-2) Constitutional Perspectives and Regulation of Banks & Banking

Business in India :
Module-3) Recovery of Debt due to Banks & other Financial Institutions :
OBJECTIVES OF COURSE :
The modern society functions, contrary to the old batter system, on monetary
transactions. In a developing country like India, the banking system takes off becomes
quite common even among the common people. The services banks render to the
general public do have a significant contribution to the development of the economy Pan
passu, the security to the assets money as well as other valuable belonging to
individuals and family units is to a large extent assured through the service of the bank.
The variety of assistance tended by the banks to the common people and business
community cannot be over emphasized in this context. The process of the working of
the banks and the legal control over them as well as the protection to the consumers of
banking services are areas which a student of law is necessarily familiar with.
Module-1) Origin and Development of Banking System :
1.1) Evolution of Banking Institutions, Origin of world Bank

1.2) Development of British Banking and Banking System in India
1.3) Types of Banks in India, Nationalized Banks, Co-operative Banks, Multi
functional Banks etc and their functions
1.4) Reserve Bank of India and its functions, Role of RBI as Central Dank
GO TO CONTENTS.
MODULE-1 QUESTIONS :
Discuss in detail : Evolution of Banking Institutions, Origin of world Bank.

Discuss in detail about evolution of Banking System and its development in India.
(Apr-2013)
Discuss : Development of British Banking.
Explain the history and origin of Bank. Write note on development of Banking in India.
(Apr-2014, Mar-2015, Apr-2016)
Explain the definition of Deposit" under the Reserve Bank of India Act, 1939 (Apr-
2014, Mar-2015)
State various types of Banks in India and narrate their main functions. (Apr-2013)
Explain : Schedule Commercial Bank (Apr-2014, Mar-2015, Apr-2016)
Explain : Nationalization of Banks in India and effect thereof (Apr-2013, Mar-2015)
Explain the structure of Co-operative Banks in India and their functions. (Apr-2014,
Mar-2015, Apr-2016)
Explain : Primary co-operative banks (Apr-2014, Mar-2015)
Discuss : Multi functional Banks.
Explain : State the distinction between Commercial and Co-operative Banks
(Apr-2014)
Explain : Agricultural Banks and their requirements. (Apr-2013, Apr-2014, Apr-
2016)
Explain : Necessity of agricultural banks (Mar-2015)
Explain in detail various functions of the Reserve Bank of India. Why the Reserve
Bank of India is called "Central Bank" ? (Apr-2013, Mar-2015, Apr-2016)
Explain : Functions of Reserve Bank of India (Apr-2014)
MODULE-1 ANSWERS :
Discuss in detail : Evolution of Banking Institutions, Origin of world Bank.

ANS :
Refer :
https://en.wikipedia.org/wiki/Bank
https://en.wikipedia.org/wiki/Banking_in_India
http://www.globalexchange.org/resources/wbimf/origins
Intro :
The word bank was borrowed in Middle English
from Middle French banque,
from Old Italian banca, meaning "table",
from Old High German banc, bank "bench, counter". Benches were used as
makeshift desks or exchange counters during the Renaissance by Jewish
Florentine bankers, who used to make their transactions atop desks covered by
green tablecloths.
Definition of bank : The definition of a bank varies from country to country. Most
acceptable definition is,
A bank is a financial institution that accepts deposits from the public and creates
credit. And engage in lending activities either directly or indirectly through
capital markets.
Banker :
A banker is defined, under English common law, as a person who carries on the
business of banking, which is specified as :
conducting current accounts for his customers,
paying cheques drawn on him/her, and
collecting cheques for his/her customers.
banker includes a body of persons, whether incorporated or not, who carry on
the business of banking'.
Although this definition seems circular, it is actually functional, because it
ensures that the legal basis for bank transactions such as cheques does not
depend on how the bank is structured or regulated.
In most common law jurisdictions there is a Bills of Exchange Act that codifies
the law in relation to negotiable instruments, including cheques, and this Act
contains a statutory definition of the term banker :

The business of banking is in many English common law countries not defined by
statute but by common law, the definition above. In other English common law
jurisdictions there are statutory definitions of the business of banking or banking
business. When looking at these definitions it is important to keep in mind that
they are defining the business of banking for the purposes of the legislation, and
not necessarily in general. In particular, most of the definitions are from
legislation that has the purpose of regulating and supervising banks rather than
regulating the actual business of banking. However, in many cases the statutory
definition closely mirrors the common law one.
Examples of statutory definitions : "banking business" means the business of
receiving money on current or deposit account, paying and collecting cheques
drawn by or paid in by customers, the making of advances to customers, and
includes such other business as the Authority may prescribe for the purposes
of this Act; (Banking Act (Singapore), Section 2, Interpretation).
What is banking ?
The business of banking is in many English common law countries not defined by
statute but by common law, the definition above. In other English common law
jurisdictions there are statutory definitions of the business of banking or banking
business. When looking at these definitions it is important to keep in mind that
they are defining the business of banking for the purposes of the legislation, and
not necessarily in general. In particular, most of the definitions are from
legislation that has the purpose of regulating and supervising banks rather than
regulating the actual business of banking. However, in many cases the statutory
definition closely mirrors the common law one. Examples of statutory definitions:
"banking business" means the business of receiving money on current or deposit
account, paying and collecting cheques drawn by or paid in by customers, the
making of advances to customers, and includes such other business as the
Authority may prescribe for the purposes of this Act; (Banking Act (Singapore),
Section 2, Interpretation).
History/ evolution of banking :
Around 2000 BC, in Assyria and Babylonia, banking began with the first prototype
banks of merchants of the ancient world, which made grain loans to farmers and
traders who carried goods between cities.
Later, in ancient Greece and during the Roman Empire, lenders based in temples
made loans and added two important innovations :
they accepted deposits and changed money.
Archeology from this period in ancient China and India also shows evidence of
money lending activity.
Origin of modern banking :

The origins of modern banking can be traced to medieval and early Renaissance
Italy, to the rich cities in the centre and north like Florence, Lucca, Siena, Venice
and Genoa.
The Bardi and Peruzzi families dominated banking in 14th-century Florence,
establishing branches in many other parts of Europe.
One of the most famous Italian banks was the Medici Bank, set up by Giovanni di
Bicci de' Medici in 1397.
The earliest known state deposit bank, Banco di San Giorgio (Bank of St.
George), was founded in 1407 at Genoa, Italy.
Origin of modern banking practice / fractional reserve banking :
Modern banking practices, including fractional reserve banking and the issue of
banknotes, emerged in the 17th and 18th centuries.
Merchants started to store their gold with the goldsmiths of London, who
possessed private vaults, and charged a fee for that service.
In exchange for each deposit of precious metal, the goldsmiths issued receipts
certifying the quantity and purity of the metal they held as a bailee;
these receipts could not be assigned, only the original depositor could collect the
stored goods.
Gradually the goldsmiths began to lend the money out on behalf of the
depositor, which led to the development of modern banking practices;
promissory notes (which evolved into banknotes) were issued for money
deposited as a loan to the goldsmith.
The goldsmith paid interest on these deposits. Since the promissory notes were
payable on demand, and the advances (loans) to the goldsmith's customers
were repayable over a longer time period, this was an early form of fractional
reserve banking.
The promissory notes developed into an assignable instrument which could
circulate as a safe and convenient form of money backed by the goldsmith's
promise to pay, allowing goldsmiths to advance loans with little risk of default.
Thus, the goldsmiths of London became the forerunners of banking by creating
new money based on credit.
1695 : The Bank of England was the first to begin the permanent issue of
banknotes, in 1695.
1728 : The Royal Bank of Scotland established the first overdraft facility in 1728.
By the beginning of the 19th century a bankers' clearing house was established in
London to allow multiple banks to clear transactions.
Functions of banks :
Banks act as payment agents by conducting checking or current accounts for
customers, paying cheques drawn by customers on the bank, and collecting
cheques deposited to customers' current accounts. Banks also enable customer
payments via other payment methods such as Automated Clearing House (ACH),
Wire transfers or telegraphic transfer, EFTPOS, and automated teller machines
(ATMs).
Banks borrow money by accepting funds deposited on current accounts, by
accepting term deposits, and by issuing debt securities such as banknotes and
bonds. Banks lend money by making advances to customers on current accounts,
by making installment loans, and by investing in marketable debt securities and
other forms of money lending.
Banks provide different payment services, and a bank account is considered
indispensable by most businesses and individuals. Non-banks that provide payment
services such as remittance companies are normally not considered as an adequate
substitute for a bank account.
Banks can create new money when they make a loan. New loans throughout the
banking system generate new deposits elsewhere in the system. The money supply
is usually increased by the act of lending, and reduced when loans are repaid faster
than new ones are generated.
Channels : Banks offer many different channels to access their banking and other
services:
Automated teller machines
A branch in a retail location
Call centre
Mail: most banks accept cheque deposits via mail and use mail to communicate
to their customers, e.g. by sending out statements
Mobile banking is a method of using one's mobile phone to conduct banking
transactions
Online banking is a term used for performing multiple transactions, payments
etc. over the Internet
Relationship managers, mostly for private banking or business banking, often
visiting customers at their homes or businesses
Telephone banking is a service which allows its customers to conduct
transactions over the telephone with automated attendant, or when requested,
with telephone operator
Origin of World Bank :
The World Bank and International Monetary Fund (IMF) were created at the end of
World War II by the U.S. and British governments.
During the war the business classes of Europe were either supporting the Nazis,
getting their banks and factories bombed into oblivion or they fled Europe with
all the money they could carry.
On the other hand, socialists, communists and anarchists had high credibility
because they were the leaders of the Resistance to Nazi occupation.
In order to prevent leftists from coming to power in western Europe, it was
crucial to U.S. and British elites to get the business classes back into power. This
required international institutions that would promote capitalist policies and
strengthen the power of the corporate sector.
The World Bank focused on making loans to governments in order to rebuild
railroads, highways, bridges, ports and other "infrastructure", i.e., the parts of the
economy that are not profitable for private companies to build so they are left to
the public sector (the taxpayers).
After an initial focus on western Europe the World Bank shifted its lending
toward the third world.
The IMF was established to smooth world commerce by reducing foreign exchange
restrictions and using its reserve of funds to lend to countries experiencing
temporary balance of payments problems so they could continue trading without
interruption. This pump-priming of the world market would benefit all trading
nations, especially the biggest traders, the U.S. and England.
The unwritten goal of the IMF and World Bank was to integrate the elites of all
countries into the capitalist world system of rewards and punishments.
The billions of dollars controlled by the IMF and World Bank have helped to
create greater allegiance of national elites to the elites of other countries than
they have to their own national majorities.
When the World Bank and IMF lend money to debtor countries the money comes
with strings attached. The policy prescriptions are usually referred to as
"structural adjustment" and they require that debtor governments open their
economies up to penetration by foreign corporations, allowing them access to
the workers and natural resources of the country at bargain basement prices..
Other policies imposed under structural adjustment include: allowing foreign
corporations to repatriate profits, balancing the government budget (often by
cutting social spending), selling off publicly owned assets ("privatization") and
devaluing the currency.
Many grassroots groups in the Third World talk about the recolonization of their
countries as they steadily lose control over their own land, factories and services.
GO TO MODULE-1 QUESTIONS.
GO TO CONTENTS.
Discuss in detail about evolution of Banking System and its development in India.
(Apr-2013)
Discuss : Development of British Banking.
Explain the history and origin of Bank. Write note on development of Banking in India.
(Apr-2014, Mar-2015, Apr-2016)
ANS :
Refer :
https://en.wikipedia.org/wiki/Banking_in_India
Evolution of banking in India :
Ancient India :
The Vedas (20001400 BCE) are earliest Indian texts to mention the concept of
usury. The word kusidin is translated as usurer. The Sutras (700100 BCE) and
the Jatakas (600400 BCE) also mention usury. Also, during this period, texts
began to condemn usury. Vasishtha forbade Brahmin and Kshatriya varnas from
participating in usury. By the 2nd century CE, usury seems to have become more
acceptable. The Manusmriti considers usury an acceptable means of acquiring
wealth or leading a livelihood. It also considers money lending above a certain
rate, different ceiling rates for different caste, a grave sin.
The Jatakas also mention the existence of loan deeds. These were called
rnapatra or rnapanna. The Dharmashastras also supported the use of loan
deeds. Kautilya has also mentioned the usage of loan deeds. Loans deeds were
also called rnalekhaya.
Later during the Mauryan period (321185 BCE), an instrument called adesha
was in use, which was an order on a banker directing him to pay the sum on the
note to a third person, which corresponds to the definition of a modern bill of
exchange. The considerable use of these instruments has been recorded[citation
needed]. In large towns, merchants also gave letters of credit to one another.
Medieval era :
The use of loan deeds continued into the Mughal era and were called dastawez.
Two types of loans deeds have been recorded. The dastawez-e-indultalab was
payable on demand and dastawez-e-miadi was payable after a stipulated time.
Colonial era :
Banking in India, in the modern sense, originated in the last decades of the 18th
century. Among the first banks were the Bank of Hindostan, which was
established in 1770 and liquidated in 182932; and the General Bank of India,
established in 1786 but failed in 1791.
During the period of British rule merchants established the Union Bank of
Calcutta in 1829, first as a private joint stock association, then partnership. Its
proprietors were the owners of the earlier Commercial Bank and the Calcutta
Bank, who by mutual consent created Union Bank to replace these two banks. In
1840 it established an agency at Singapore, and closed the one at Mirzapore
that it had opened in the previous year. Also in 1840 the Bank revealed that it
had been the subject of a fraud by the bank's accountant. Union Bank was
incorporated in 1845 but failed in 1848, having been insolvent for some time and
having used new money from depositors to pay its dividends.
The Allahabad Bank, established in 1865 and still functioning today, is the oldest
Joint Stock bank in India, it was not the first though. That honour belongs to the
Bank of Upper India, which was established in 1863 and survived until 1913,
when it failed, with some of its assets and liabilities being transferred to the
Alliance Bank of Simla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The
Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another
in Bombay in 1862; branches followed in Madras and Pondicherry, then a French
possession. HSBC established itself in Bengal in 1869. Calcutta was the most
active trading port in India, mainly due to the trade of the British Empire, and so
became a banking centre
World War I & World War II :
During the First World War (19141918) through the end of the Second World
War (19391945), and two years thereafter until the independence of India were
challenging for Indian banking. The years of the First World War were turbulent,
and it took its toll with banks simply collapsing despite the Indian economy
gaining indirect boost due to war-related economic activities.
Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and
West Bengal, paralyzing banking activities for months. India's independence
marked the end of a regime of the Laissez-faire for the Indian banking. The
Government of India initiated measures to play an active role in the economic
life of the nation, and the Industrial Policy Resolution adopted by the
government in 1948 envisaged a mixed economy. This resulted in greater
involvement of the state in different segments of the economy including banking
and finance. The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was established
in April 1935, but was nationalized on 1 January 1949 under the terms of the
Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).
In 1949, the Banking Regulation Act was enacted, which empowered the
Reserve Bank of India (RBI) "...to regulate, control, and inspect the banks in
India."
The Banking Regulation Act also provided that no new bank or branch of an
existing bank could be opened without a license from the RBI, and no two
banks could have common directors.
State Bank of India :
The largest bank, and the oldest still in existence, is the State Bank of India
(S.B.I). It originated as the Bank of Calcutta in June 1806. In 1809, it was
renamed as the Bank of Bengal. This was one of the three banks funded by a
presidency government, the other two were the Bank of Bombay and the Bank of
Madras. The three banks were merged in 1921 to form the Imperial Bank of
India, which upon India's independence, became the State Bank of India in
1955. For many years the presidency banks had acted as quasi-central banks, as
did their successors, until the Reserve Bank of India was established in 1935,
under the Reserve Bank of India Act, 1934.
In 1960, the State Banks of India was given control of eight state-associated
banks under the State Bank of India (Subsidiary Banks) Act, 1959. These are
now called its associate banks. In 1969 the Indian government nationalised 14
major private banks. In 1980, 6 more private banks were nationalised. These
nationalised banks are the majority of lenders in the Indian economy. They
dominate the banking sector because of their large size and widespread
networks.
Nationalisation in the 1960s
Despite the provisions, control and regulations of the Reserve Bank of India,
banks in India except the State Bank of India (SBI), remain owned and operated
by private persons. By the 1960s, the Indian banking industry had become an
important tool to facilitate the development of the Indian economy. At the same
time, it had emerged as a large employer, and a debate had ensued about the
nationalisation of the banking industry. Indira Gandhi, the then Prime Minister of
India, expressed the intention of the Government of India in the annual
conference of the All India Congress Meeting in a paper entitled "Stray thoughts
on Bank Nationalization."[20] The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an
ordinance ('Banking Companies (Acquisition and Transfer of Undertakings)
Ordinance, 1969') and nationalised the 14 largest commercial banks with effect
from the midnight of 19 July 1969. These banks contained 85 percent of bank
deposits in the country.[20] Jayaprakash Narayan, a national leader of India,
described the step as a "masterstroke of political sagacity." Within two weeks of
the issue of the ordinance, the Parliament passed the Banking Companies
(Acquisition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9 August 1969.
A second dose of nationalisation of 6 more commercial banks followed in 1980.
The stated reason for the nationalisation was to give the government more
control of credit delivery. With the second dose of nationalisation, the
Government of India controlled around 91% of the banking business of India.
Liberalisation in the 1990s
In the early 1990s, the then government embarked on a policy of liberalisation,
licensing a small number of private banks. These came to be known as New
Generation tech-savvy banks, and included Global Trust Bank (the first of such
new generation banks to be set up), which later amalgamated with Oriental Bank
of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank.
This move, along with the rapid growth in the economy of India, revitalised the
banking sector in India, which has seen rapid growth with strong contribution
from all the three sectors of banks, namely, government banks, private banks
and foreign banks.
The next stage for the Indian banking has been set up, with proposed relaxation
of norms for foreign direct investment. All foreign investors in banks may be
given voting rights that could exceed the present cap of 10% at present. It has
gone up to 74% with some restrictions.
The Indian banking sector is broadly classified into scheduled banks and non-
scheduled banks.
The scheduled banks are those included under the 2 nd Schedule of the
Reserve Bank of India Act, 1934. The scheduled banks are further classified
into:
Scheduled Commercial Banks
Public Sector
State Bank of India and its associates;
Nationalised banks; (includes IDBI)
Private Sector
Old
New
Foreign banks;
Regional Rural Banks (RRBs);
Scheduled Co-operative Banks
State Co-operative Banks and
Urban Cooperative Banks

non-scheduled banks
The term commercial banks refers to both scheduled and non-scheduled
commercial banks regulated under the Banking Regulation Act, 1949.
Pradhan Mantri Jan Dhan Yojana : Prime Minister's People Money Scheme :
This is a scheme for comprehensive financial inclusion launched by the Prime
Minister of India, Narendra Modi, in 2014. Run by Department of Financial
Services, Ministry of Finance, on the inauguration day, 1.5 Crore (15 million)
bank accounts were opened under this scheme. By 15 July 2015, 16.92 crore
accounts were opened, with around 20,288.37 crore (US$3.0 billion) were
deposited under the scheme, which also has an option for opening new bank
accounts with zero balance.
Conclusion : Criticism of development of banking in India :
Reach in rural India and to the poor still remains a challenge. The government
has developed initiatives to address this through the State Bank of India
expanding its branch network and through the National Bank for Agriculture and
Rural Development (NBARD) with facilities like microfinance
Development of British banking :
<work on this>
GO TO CONTENTS.
Explain the definition of Deposit" under the Reserve Bank of India Act, 1939 (Apr-
2014, Mar-2015)
ANS :
Refer :
https://en.wikipedia.org/wiki/Deposit_account
http://www.investopedia.com/terms/b/bank-deposits.asp
page-101 of https://www.icsi.edu/docs/webmodules/Publications/9.1%20Banking
%20Law%20-Professional.pdf
What is meant by Deposit ?
Deposit (in banking parlance) consist of money placed into banking institutions for
safekeeping.
The Deposit can be made to a deposit account such as savings accounts, checking
accounts and money market accounts.
The account holder has the right to withdraw deposited funds, as set forth in the
terms and conditions governing the account agreement.
In banking, the verbs "deposit" and "withdrawal" mean a customer paying money
into, and taking money out of, an account. From a legal and financial accounting
standpoint, the noun "deposit" is used by the banking industry in financial statements
to describe the liability owed by the bank to its depositor, and not the funds that the
bank holds as a result of the deposit, which are shown as assets of the bank.
Subject to restrictions imposed by the terms and conditions of the account, the
account holder (customer) retains the right to have the deposited money repaid on
demand. The terms and conditions may specify the methods by which a customer
may move money into or out of the account, e.g., by cheque, internet banking,
EFTPOS or other channels.
Deposit account :
A deposit account is a savings account, current account or any other type of bank
account that allows money to be deposited and withdrawn by the account holder.
These transactions are recorded on the bank's books, and the resulting balance is
recorded as a liability for the bank and represents the amount owed by the bank to
the customer.
Some banks may charge a fee for this service, while others may pay the customer
interest on the funds deposited.
Deeper meaning of 'Deposit' :
A depositor opening a checking account at a bank in the United States with $100 in
cash surrenders legal title to the $100 in cash, which becomes an asset of the
bank.
On the bank's books, the bank
debits its currency and coin on hand account for the $100 in cash, and
credits a liability account (called a demand deposit account, checking account,
etc.) for an equal amount.
In the audited financial statements of the bank, the $100 in currency would be
shown on the balance sheet as an asset of the bank on the left side, and the
deposit account would be shown as a liability owed by the bank to its customer, on
the right side of the balance sheet.
The bank's financial statement reflects the economic substance of the transaction
which is that the bank has borrowed $100 from its depositor and has contractually
obliged itself to repay the customer according to the terms of the agreement.
Typically, an account provider will not hold the entire sum in reserve, but will loan
most of the money out to other clients, in a process known as fractional-reserve
banking. This allows providers to earn interest on the asset and hence to pay out
interest on deposits.
By transferring the ownership of deposits from one party to another, banks can
avoid using physical cash as a method of payment.
Commercial bank deposits account for most of the money supply in use today. For
example, if a bank in the United States makes a loan to a customer by depositing
the loan proceeds in that customer's checking account, the bank typically records
this event by debiting an asset account on the bank's books (called loans receivable
or some similar name) and credits the deposit liability or checking account of the
customer on the bank's books.
From an economic standpoint, the bank has essentially created economic money
(although not legal tender). The customer's checking account balance has no dollar
bills in it, as a demand deposit account is simply a liability owed by the bank to its
customer. In this way, commercial banks are allowed to increase the money supply
(without printing currency, or legal tender).
GO TO CONTENTS.
State various types of Banks in India and narrate their main functions. (Apr-2013)
Explain : Scheduled Commercial Bank (Apr-2014, Mar-2015, Apr-2016)
ANS :
Refer :
https://en.wikipedia.org/wiki/Bank#Types_of_banks
http://www.knowledgevilla.in/cooperative-banks/
https://en.wikipedia.org/wiki/Scheduled_bank
page-20 of https://www.icsi.edu/docs/webmodules/Publications/9.1%20Banking
http://www.excellcareeronline.com/meterials/437126443246.pdf
Intro :
What is a bank ? The word bank was borrowed in Middle English
The name bank derives from the Italian word banco "desk/bench", used during
the Renaissance era by Florentine bankers, who used to carry out their
transactions on a desk covered by a green tablecloth.
A bank is a type of financial institution that provides services such as accepting
deposits, making business loans, and offering basic investment products.
What is a scheduled bank ?
Scheduled Banks are the banks which are listed in the Second Schedule of the
Reserve Bank of India Act 1934.
The scheduled banks enjoy several privileges as compared to non- scheduled
banks.
Scheduled banks are entitled to receive refinance facilities from the Reserve
Bank of India.
They are also entitled for currency chest facilities. They are entitled to become
members of the Clearing House.
What is a commercial bank ?
Unlike co-operative banks which work on a no profit, no loss basis, commercial
banks operate on "for-profit" basis. Motive for profit is the distinct character of
commercial banks.
Reserve Bank of India as a Central Bank of the Country :
The Reserve Bank, as the central bank of the country, started their operations as a
private shareholders bank.
RBI replaced the Imperial Bank of India and started issuing the currency notes and
acting as the banker to the government. Imperial Bank of India was allowed to act
as the agent of the RBI.
RBI covered all over the undivided India.
In order to have close integration between policies of the Reserve Bank and those
of the Government, It was decided to nationalize the Reserve Bank immediately
after the independence of the country.
From 1 st January 1949, the Reserve Bank began functioning as a State-owned and
State-controlled Central Bank.
To streamline the functioning of commercial banks, the Government of India
enacted the Banking Companies Act,1949 which was later changed as the Banking
Regulation Act 1949.
RBI acts as a regulator of banks, banker to the Government and bankers bank.
It controls financial system in the country through various measures.
Outline of the classification of Scheduled Commercial Banks :
Scheduled Banks
Commercial Banks
Public Sector
State Bank of India and its associates;
Nationalised banks; (includes IDBI)
Private Sector
Old
New
Foreign banks;
Regional Rural Banks (RRBs);
Co-operative Banks
State Co-operative Banks and
Urban Cooperative Banks
Non-scheduled Banks
Detailed discussion on outline of Types of banks : The Indian banking sector is

broadly classified into scheduled banks and non-scheduled banks.
The scheduled banks : By definition, any bank which is listed in the 2nd schedule of
the Reserve Bank of India Act, 1934 is considered a scheduled bank. To qualify as a
scheduled bank, the paid up capital and collected funds of the bank must not be
less than Rs5 lakh. Scheduled banks are eligible for loans from the Reserve Bank of
India at bank rate, and are given membership to clearing houses. Besides
commercial banks, cooperative banks may also become scheduled banks if they
fulfill the criteria stipulated by RBI
Commercial Banks : According to the RBI, Commercial Banks refer to both
scheduled and non-scheduled commercial banks which are regulated under

Banking Regulation Act, 1949. Commercial banks operate on a for-profit basis.
They primarily engage in the acceptance of deposit and extend loans to the
general public, businesses and the government.
Public Sector : The term public sector banks by itself connotes a situation
where the major/full stake in the banks are held by the Government. Till
July,1969, there were only 8 Public Sector Banks (SBI & its 7 associate
banks). When 14 commercial banks (total 20 banks) were nationalized in
1969, 100% ownership of these banks were held by the Government of India.
Subsequently, six more private banks were nationalized in 1980. However,
with the changing in time and environment, these banks were allowed to raise
capital through IPOs and there by the share holding pattern has changed. By
default the minimum 51% shares would be kept by the Government of India,
and the management control of these nationalized banks is only with Central
Government.
State Bank of India (Imperial Bank of India until 1955) and its 8 associate
banks (1960);
Nationalised banks : Those banks which were nationalized in 1969 (14
banks) & 1980 (6 banks)
Other public sector bank (IDBI)
Private Sector : Banks which are commercial and not-nationalized.
Old : The old private sector banks existed prior to the nationalisation in
1969 and kept their independence because they were either too small or
specialist to be included in nationalisation. Examples : Jammu & Kashmir
Bank Ltd, The Federal Bank, The Laxmi Vilas Bank etc
New : The new private sector banks are those that have gained their
banking license since the liberalisation in the 1993. Examples : UTI bank
(presently called Axis Bank) ICICI Bank, HDFC Bank, Kotak Mahindra Bank,
Yes Bank etc
Foreign banks : Banks in which majority shares are held by foreign entities.
Foreign banks have their registered offices outside India, and through their
branches they operate in India. Foreign banks are allowed on reciprocal basis.
They are allowed to operate through branches or wholly owned subsidiaries.
These foreign banks are very active in Treasury (forex) and Trade Finance and
Corporate Banking activities. Foreign banks have to adhere to all local laws as
well as guidelines and directives of Indian Regulators such as Reserve Bank of
India, Insurance and Regulatory Development Authority, Securities Exchange
Board of India
Regional Rural Banks (RRBs) : Regional Rural Banks or RRBs, simply put,
serve the rural areas and agricultural sectors with basic banking and adequate
financial services. Several commercial banks have sponsored RRBs. Prominent
examples include the Maharashtra Gramin Bank (sponsored by the Bank of
Maharashtra) and the Himachal Gramin Bank (sponsored by Punjab National
Bank). RRBs were set up to eliminate other unorganized financial institutions
like money lenders and supplement the efforts of co-operative banks.
Co-operative Banks : All banks registered under the Cooperative Societies Act,
1912 are considered co-operative banks. Unlike commercial banks, who are
driven by profit, co-operative banks work on a no profit, no loss basis. These
are regulated by the Reserve Bank of India under the Banking Regulation Act,
1949 and Banking Laws (Application to Co-operative Societies) Act, 1965.
State Co-operative Banks : These are main cooperative bank in every state
that runs and lends money all the central cooperative banks in that state
Urban Cooperative Banks : In the urban centers, they mainly finance
entrepreneurs, small businesses, industries, self-employment and cater to
home buying and educational loans.
non-scheduled banks : Non-scheduled banks by definition are those which are not
listed in the 2nd schedule of the RBI act, 1934. Banks with a reserve capital of less
than 5 lakh rupees qualify as non-scheduled banks. Unlike scheduled banks, they
are not entitled to borrow from the RBI for normal banking purposes, except, in
emergency or abnormal circumstances. Usually those banks which according to
the judgement of the Reserve Bank, are not capable of serving and protecting the
interest of depositors are classified as non-scheduled banks.
GO TO CONTENTS.
Explain : Nationalization of Banks in India and effect thereof (Apr-2013, Mar-2015)

ANS :
Refer :
https://en.wikipedia.org/wiki/Nationalization
https://en.wikipedia.org/wiki/Banking_in_India#Nationalisation_in_the_1960s
https://www.icsi.edu/docs/webmodules/Publications/9.1%20Banking%20Law%20-
Professional.pdf
What is nationalization ?
Nationalization, or nationalisation, is the process of transforming private assets into
public assets by bringing them under the public ownership of a national
government or state.[1] Nationalization usually refers to private assets or assets
owned by lower levels of government, such as municipalities, being transferred to

the state. The opposites of nationalization are privatization
Nationalization may occur with or without compensation to the former owners.
Nationalization is distinguished from property redistribution in that the government
retains control of nationalized property.
RBI nationalization in 1949 :
The partition of India in 1947 adversely impacted the economies of Punjab and
West Bengal, paralyzing banking activities for months. India's independence
marked the end of a regime of the Laissez-faire for the Indian banking. The
Government of India initiated measures to play an active role in the economic life
of the nation, and the Industrial Policy Resolution adopted by the government in
1948 envisaged a mixed economy. This resulted in greater involvement of the state
in different segments of the economy including banking and finance. The major
steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was established in
April 1935, but was nationalized on 1 January 1949 under the terms of the
Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).
In 1949, the Banking Regulation Act was enacted, which empowered the Reserve
Bank of India (RBI) "...to regulate, control, and inspect the banks in India."
The Banking Regulation Act also provided that no new bank or branch of an
existing bank could be opened without a license from the RBI, and no two banks
could have common directors.
From Imperial Bank to State Bank of India in 1955 :
The largest public sector bank (and also the oldest), is the State Bank of India
(S.B.I).
It originated as the Bank of Calcutta in June 1806.
In 1809, it was renamed as the Bank of Bengal.
This was one of the three banks funded by a presidency government, the other two
were the Bank of Bombay and the Bank of Madras.
The three banks were merged in 1921 to form the Imperial Bank of India, which
upon India's independence, became the State Bank of India in 1955.
For many years the presidency banks had acted as quasi-central banks, as did their
successors, until the Reserve Bank of India was established in 1935, under the
Reserve Bank of India Act, 1934.
Bank Nationalisation in the 1969 :
After independence, despite the provisions, control and regulations of the Reserve
Bank of India, banks in India except the State Bank of India (SBI), remain owned
and operated by private persons.
By the 1960s, the Indian banking industry had become an important tool to
facilitate the development of the Indian economy. At the same time, it had
emerged as a large employer, and a debate had ensued about the nationalisation of
the banking industry. Indira Gandhi, the then Prime Minister of India, expressed the
intention of the Government of India in the annual conference of the All India
Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The
meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an
ordinance ('Banking Companies (Acquisition and Transfer of Undertakings)
Ordinance, 1969') and nationalized the 14 largest private commercial banks with
effect from the midnight of 19 July 1969.
Most of these banks having deposits of above `50 crores were promoted in the
past by the industrialists.
These banks were : 1. Allahabad Bank 2. Bank of Baroda 3. Bank of India 4.
Bank of Maharashtra 5. Canara Bank 6. Central Bank of India 7. Dena Bank 8.
Indian Bank 9. Indian Overseas Bank 10. Punjab National Bank 11. Syndicate
Bank 12. Union Bank of India 13. United Bank of India 14. United Commercial
Bank (now known as UCO bank)
Together, these banks contained 85 percent of bank deposits in the country.
The purpose of nationalization was :
(a) to increase the presence of banks across the nation.
(b) to provide banking services to different segments of the Society.
(c) to change the concept of class banking into mass banking, and
(d) to support priority sector lending and growth.
Jayaprakash Narayan, a national leader of India, described the step as a
"masterstroke of political sagacity."
Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it received the
presidential approval on 9 August 1969.
Nationalisation in the 1980 :
A second dose of nationalisation of 6 more commercial banks, with deposits of
above Rs 200 crores, followed in 1980.
These private commercial banks, were : 1. Andhra Bank 2. Corporation Bank 3.
New Bank of India 4. Punjab and Sind Bank 5. Oriental Bank of Commerce 6.
Vijaya Bank
The purpose for nationalization was similar as in 1969.
With the second dose of nationalisation, the Government of India controlled around
91% of the banking business of India.

Later on, in the year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalized banks and resulted in
the reduction of the number of nationalized banks from 20 to 19.
Until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the
average growth rate of the Indian economy.
Conclusion :
The nationalization of banks resulted in rapid branch expansion and the number of
commercial bank branches have increased many folds in Metro, Urban, SemiUrban
and Rural Areas.
The branch network assisted banks to mobilize deposits and lot of economic
activities have been started on account of priority sector lending.
GO TO CONTENTS.
Explain the structure of Co-operative Banks in India and their functions. (Apr-2014,
Mar-2015, Apr-2016)
Explain : Primary co-operative banks (Apr-2014, Mar-2015)
ANS :
Refer :
page-25 https://www.icsi.edu/docs/webmodules/Publications/9.1%20Banking
https://en.wikipedia.org/wiki/Cooperative_banking
Cooperative banking is retail and commercial banking organized on a cooperative
basis. Cooperative banking institutions take deposits and lend money in most parts of
the world. Cooperative banking has its roots in Credit Unions.
Credit unions :
Credit unions have the purpose of promoting thrift, providing credit at reasonable
rates, and providing other financial services to its members.
Its members are usually required to share a common bond, such as locality,
employer, religion or profession, and credit unions are usually funded entirely by
member deposits, and avoid outside borrowing.
They are typically (though not exclusively) the smaller form of cooperative
banking institution. In some countries they are restricted to providing only
unsecured personal loans, whereas in others, they can provide business loans to
farmers, and mortgages.

Applicability of laws :
If a cooperative bank is operating in more than one State, the Central Cooperative
Societies Act is applicable. In other cases the State laws are applicable.
Apart from above following laws govern cooperative banking,
the RBI Act, 1934
the BR Act, 1949.
the Banking Laws (Application to Co-operative Societies) Act, 1965
the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004,
Nature and role of Cooperative banks :
Larger institutions are often called cooperative banks. Some are tightly integrated
federations of credit unions, though those member credit unions may not subscribe
to all nine of the strict principles of the World Council of Credit Unions (WOCCU).
Like credit unions, cooperative banks are owned by their customers and follow the
cooperative principle of one person, one vote.
Unlike credit unions, however, cooperative banks are often regulated under both
banking and cooperative legislation.
They provide services such as savings and loans to non-members as well as to
members, and some participate in the wholesale markets for bonds, money and
even equities.
Many cooperative banks are traded on public stock markets, with the result that
they are partly owned by non-members. Member control is diluted by these outside
stakes, so they may be regarded as semi-cooperative.
Cooperative 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.
According to the Act, a cooperative bank is a cooperative society registered or
deemed to have been registered under any State or Central Act.
These cooperative banks cater to the needs of agriculture, retail trade, small and
medium industry and self-employed businessmen usually in urban, semi urban and
rural areas.
In case of co-operative banks, the shareholders should be members of the
cooperative banks. The share linkage to borrowing is a distinctive feature of a
cooperative bank.
Rural cooperative sector in India plays a vital role in fulfilling the credit
requirements of rural agricultural sector of India. At recent times, the rural credit
flow through rural cooperative sector has risen substantially in order to keep pace
with the growing demand for credit in the rural parts of India.
The Cooperative rural Credit Structure in our country are of following types :
1. Short Term Agricultural Credit institutions :
The short term credit structure consists of the Primary Agricultural Credit
Societies at the base level, which are affiliated at the district level into the
District Central Cooperative bank and further into the State Cooperative Bank
at the State level.
Being federal structures, the membership of the DCCB comprises all the
affiliated PACS and other functional societies and for the SCB, the members
are the affiliated DCCBs.
The DCCB being the middle tier of the Cooperative Credit Structure, is
functionally positioned to deal with the concerns of both the upper and lower
tiers. This very often puts the DCCB in a position of balancing competing
concerns.
There are 30 State Cooperative Banks. These banks support and guide 372
District Central Cooperative Banks (DCCBs) in India which have 13478
branches as on March, 2013.
These DCCBs are providing finance to more than 35 lakhs farmers through
about 1.15 lacs Primary Agricultural Cooperative Societies (PACS).
2. Long Term Agricultural Credit Institutions :
The long term cooperative credit structure consists of the State Cooperative
Agriculture & Rural Development Banks (SCARDBs) and Primary Cooperative
Agriculture & Rural Development Banks (PCARDBs) which are affiliated to the
SCARDBs.
The total No. of SCARDBs are 19; of which 10 have Federal Structure, 7 have
Unitary Structure and 2 have Mixed Structure (i.e. operating through
PCARDBs as well as its own branches).
Loans are given to members on the mortgages of their land usually up to 50%
of their value in some states or up to 30 times the land revenue payable in
other states, duly taking into account their need and repayment capacity.
The performance of these banks as on 31 st March 2012 has been as under :
No. of SCARDBs 19
No. of PCARDBs 714
No. of Branches of PCARDBs 1,056
No. of Branches of Unitary SCARDBs 761
Annual Lending 17,603.42 Cr

Total Membership 13.65 Million
3. Urban Cooperative Banks :
The term Urban Cooperative Banks (UCBs), although not formally defined,
refers to the primary cooperative banks located in urban and semi-urban
areas.
These banks, until 1996, were allowed to lend money only to non-agricultural
purposes.
These banks have traditionally been around communities, localities working
out in essence, loans to small borrowers and businesses. Today their scope of
operation has expanded considerably.
The urban co-operative banks can spread operations to other States and such
banks are called as multi state cooperative banks.
They are governed by the Banking Regulations Act 1949 and Banking Laws
(Cooperative Societies) Act, 1965.
The total number of UCBs stood at 1,618 as on 31 st March 2012.
Scheduled UCBs are banks included in the Second Schedule of the RBI Act,
1934 and include banks that have paid-up capital and reserves of not less
than Rs 5 lacs and carry out their business in the interest of depositors to the
satisfaction of the Reserve Bank.
Conclusion :
Besides public and private sector commercial banks, cooperative credit institutions
also play very important role in the rural as well as urban economy of the country.
GO TO CONTENTS.
Discuss : Multi functional Banks.

ANS :
Refer :

GO TO CONTENTS.
Explain : State the distinction between Commercial and Co-operative Banks

(Apr-2014)
ANS :
Refer :
http://keydifferences.com/difference-between-commercial-and-cooperative-
banks.html
https://www.quora.com/What-is-the-difference-between-commercial-and-co-
operative-banks
http://www.preservearticles.com/2012020722897/what-is-the-differences-
between-co-operative-banks-and-commercial-banks.html
https://iassupermitra.wordpress.com/2015/06/08/difference-between-commercial-
bank-and-co-operative-bank/
Definition of Commercial Bank :
Commercial bank refers to the banking company, which is established to serve
individuals, organisations, and businesses. It is a financial institution, which is
authorised to accept deposits from the general public and grant credit to them.
They are governed by the Banking Regulation Act, 1949 and supervised by the
Reserve Bank of India.
Commercial Banks provide short-term, medium-term, and long-term finance to the
public. However, it usually prefers to make short-term funding. There are a variety
of products offered by the banks, to its customers such as :
Deposit accounts like fixed deposit, recurring deposit, savings account, current
account, etc.
Loans such as auto loan, home loan and so on.
ATM services
Credit and debit card facility.
Acts as an agent, for the collection of cheques, bills of exchange.
Safeguards the property and wealth of persons.
Merchant banking
Trade financing
Transfer of money.
Definition of Cooperative Bank
Cooperative Banks are the financial institutions that are owned and run by their
customers and operates on the principle of one person one vote. The bank is
governed by both banking and cooperative legislation, as they are registered under
the Cooperative Society Act, 1965 and regulated by National Bank for Agriculture
and Rural Development (NABARD) & Reserve Bank of India (RBI). They operate in
both rural as well as urban areas and provide credit to borrowers and businesses.
Cooperative Banks offer a range of services like accepting deposits and granting
loans to the members and even non-members. The members are the owners and
customers of the bank at the same time. The bank offers services like
deposit accounts such as savings and current account,
safe keeping of valuables (locker facility),
loan and mortgage facility to the customers.
Key Differences Between Commercial and Cooperative Banks : The major differences
between commercial and cooperative banks are indicated below :
Commercial banks operates on the commercial principles. They operate to earn a
profit.
Cooperative banks operate on the basis/ motive of giving service to its members
and the society.
A bank established to provide banking services to the individuals and businesses is
called Commercial Bank.
A cooperative bank is a bank that provides financing to agriculturists, rural
industries and to trade and industry of urban areas (but up to a limited extent).
A commercial bank is incorporated under Banking Regulation Act, 1949.
a cooperative bank is registered under the Cooperative Societies Act, 1965.
The area of operation of a commercial bank is comparatively larger than a
cooperative bank,
cooperative banks are confined to a limited area only while commercial banks
even have their branches overseas.
Commercial banks are joint stock companies, incorporated as a banking company
that operates for the profit motive.
Cooperative banks, which are cooperative organisations, that works for service
motive.
Massive funds are available at the disposal of Commercial Banks.
Limited funds are available at the disposal of Co-operative Banks.
At present 19 Commercial Banks have been nationalised in India.
In India Co-operative Banks are not nationalised.
The borrowers of commercial banks are only account holders; they do not have any
voting power.
In Cooperative banks, the borrowers are members that influence the credit
policy by voting power.
Commercial banks primary function is to accept deposits from the public and
grants loans to individuals and businesses.
Cooperative bank, whose primary purpose is to accept deposits from members
and public, and grant loans to members, farmers and small businessmen.
Commercial banks offer an array of products to its customers,
there are limited products provided by the cooperative bank to its members.
The commercial banks interest rate on deposits is comparatively lesser
The cooperative banks interest rate on deposits is higher
Commercial banks are subject to the control of the Reserve Bank of India directly.
Co-operative banks are subject to the rules laid down by the Registrar of Co-
operative Societies.
Commercial banks in India are on a larger scale. They have adopted the system of
branch banking, so they have countrywide operations.
Co-operative banks are relatively on a much smaller scale. Many co-operative
banks follow only unit-bank system, though there are cooperative banks with a
number of branches but their coverage is not countrywide.
Commercial banks in India are of two types: (i) public sector banks and (ii) private
sector banks.
Co-operative banks are private sector banks.
Conclusion
The bank, which operates for taking deposits from and making loans to the public
is a commercial bank. On the other hand, cooperative banks are mainly established
to provide financial support to small businessmen and farmers at the low rate of
interest. The big difference between these two terms is that while the network of
former is very large whereas the network of the latter is confined to a limited area
only.
GO TO CONTENTS.
Explain : Agricultural Banks and their requirements. (Apr-2013, Apr-2014, Apr-

2016)
Explain : Necessity of agricultural banks (Mar-2015)
ANS :
Refer :
https://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developm
ent

GO TO CONTENTS.
Explain in detail various functions of the Reserve Bank of India. Why the Reserve
Bank of India is called "Central Bank" ? (Apr-2013, Mar-2015, Apr-2016)
Explain : Functions of Reserve Bank of India (Apr-2014)
ANS :
Refer :
https://en.wikipedia.org/wiki/Central_bank
https://en.wikipedia.org/wiki/Reserve_Bank_of_India
page-27 http://kamkus.org/coursematerial/BANKING%20LAW%20AND
%20NEGOTIABLE%20INSTRUMENT%20ACT%20B.A.LL.B.%20VIIITH%20SEM..pdf
http://www.legalservicesindia.com/article/article/the-reserve-bank-of-india-and-its-
role-1822-1.html
THE RESERVE BANK OF INDIA :
The Reserve Bank of India was established on 1st April 1935 with the capital of
RS.5 crores. The bank was started originally as a shareholders bank and the bank
took over the function of currency issue from the government of India and power of
credit control from the Imperial Bank of India.
The Reserve Bank of India as the Central Bank, has to perform not merely the
negative role of controlling credit and currency in the economy to maintain the
internal and external value of the rupee to ensure price stability in the economy.
But also to act as a promoter of financial institutions in the country so that its
policies could be effective promoting economic growth as per the guidelines and
policies formulated by the Government.
When the Reserve Bank of India was established in 1935, our country was a
backward country which lacked a well-developed commercial banking system apart
from the absence of a well-developed money market in the country.
After 1948 the Reserve Bank of India became very active to take steps to promote
and develop financial institutions so that the Reserve Bank of India can pursue
appropriate credit and monetary policies for economic growth and development in
an era of planned economic development of the country.
Functions of RBI :
1. Monetary Authority :
The Reserve Bank of India Formulates, implements and monitors the monetary
policy. Its main objective is maintaining price stability and ensuring adequate
flow of credit to productive sectors.
2. Regulator and Supervisor of the Financial System :
Prescribes broad parameters of banking operations within which the country's
banking and financial system functions.
Their main objective is to maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to the public.
3. Manager of Exchange Control :
The manager of the exchange control department manages the Foreign
Exchange Management Act, 1999.
Its main objective is to facilitate external trade and payment and promote
orderly development and maintenance of foreign exchange market in India.
4. Issuer of Currency :
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 Bank shall not be liable to the payment of any
stamp duty under the Indian Stamp Act, 1899 (2 of 1899) in respect of bank
notes issued by it
5. Banker to Government :
The Reserve Bank of India is to act as Government banker, agent and adviser.
The Reserve Bank is agent of Central Government and of all State Governments
in India.
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.
6. 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.
7. Developmental Role :
The Reserve Bank of India performs a wide range of promotional functions to
support national objectives.
The promotional functions are such as contests, coupons, maintaining good
public relations.
8. Banker to Banks :
The Reserve Bank of India acts as the bankers' bank.
every scheduled banks shall 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.
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.
9. Amalgamation of Banking Company by Reserve Bank :
No banking company shall be amalgamated with another banking company,
unless a scheme containing the term of such amalgamation, drafted by the
companies, has been approved by the reserve bank of India.
The bank will also determine the purchase consideration for swapping of share
between the two companies.
10. Issuing of Bank Notes :
This function which was once considered to be the most paying part of a
banker's business, is in modern times performed generally by central banking
institutions in most of the countries of the world.
Its importance to banks in general has dwindled in some of the countries, in
which the cheque currency has replaced bank-notes to a large extent. For
instance in England and in the United States of America, the part which is played
by bank notes is becoming less and less significant althought they are still very
popular in certain European countries such as France and Germany.
11. Transferring Money from Place to Place :

Modern banks are, generally, in a position to remit money, from one place or
country to another, by means of drafts drawn upon their branches or agents.
They are, also by purchasing bills of exchange, enable merchants and others to
receive money from their debtors, in other cities or countries.
Of late such transfers are also made electronically. These facilities have helped
not only the internal trade of different countries, but also the international
commerce.
12. Granting Licenses to Banking Companies :
The RBI is empowered to grant licenses for banking companies which have
requested for them under Section 22 of the RBI Act, for carrying on the business
of banking in India.
Before granting the licence, the RBI will satisfy itself that the applicant bank
fulfills the following conditions :
a) That the capital structure and earning prospects of the company are
adequate.
b) The general character of the proposed management is of a high order and
not detrimental to the interests of the depositors;
c) That the granting of licence will be in public interest.
d) That the granting of licence would not be prejudicial to the operation and
consolidation of the banking system, and that it will be consistent with the
monetary stability and economic growth.
13. Official Liquidator :
In any proceeding for the winding up of a Banking Company, upon an application
made to High Court, the High Court shall appoint Reserve Bank as the official
liquidator of the Banking Company.
The liquidator, if any, all ready functioning in such proceeding shall vacate office
upon such appointment.
Supervisory Functions of RBI : 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.
Promotional Functions of RBI : The Bank now performs a variety of
developmental and promotional functions, which, at one time, were regarded as
outside the normal scope of central banking.
The Reserve Bank was asked to promote banking habit, extend banking facilities
to rural and semi-urban areas, and establish and promote new specialized
financing agencies.
Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the
SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of
India in 1964, the Industrial Development Bank of India also in 1964, the
Agricultural Refinance Corporation of India in 1963 and the Industrial
Reconstruction Corporation of India in 1972.
These institutions were set up directly or indirectly by the Reserve Bank to
promote saving habit and to mobilise savings, and to provide industrial
finance as well as agricultural finance.
As far back as 1935, the Reserve Bank of India set up the Agricultural Credit
Department to provide agricultural credit. But only since 1951 the Bank's role in
this field has become extremely important. The Bank has developed the co-
operative credit movement to encourage saving, to eliminate moneylenders from
the villages and to route its short term credit to agriculture.
The RBI has set up the Agricultural Refinance and Development Corporation to
provide long-term finance to farmers.
WHY is RBI called a Central Bank ?
What is a Central Bank ?
A central bank is an institution that manages a state's currency, money supply,
and interest rates.
Central banks also usually oversee the commercial banking system of their
respective countries.
In contrast to a commercial bank, a central bank possesses a monopoly on
increasing the monetary base in the state, and usually also prints the national
currency, which usually serves as the state's legal tender.
The primary function of a central bank is to control the nation's money supply
(monetary policy), through active duties such as managing interest rates, setting
the reserve requirement, and acting as a lender of last resort to the banking
sector during times of bank insolvency or financial crisis.
Central banks usually also have supervisory powers, intended to prevent bank
runs and to reduce the risk that commercial banks and other financial
institutions engage in reckless or fraudulent behavior.
Central banks in most developed nations are institutionally designed to be
independent from political interference. Still, limited control by the executive and
legislative bodies usually exists.
Naming of Central Banks : There is no standard terminology for the name of a
central bank,
Many countries use the "Bank of Country" form for example :
Bank of England (which, despite its name, is in fact the central bank of the
United Kingdom as a whole. The name's lack of representation of the entire
United Kingdom ('Bank of Britain', for example) can be owed to the fact that
its establishment occurred when the Kingdoms of England, Scotland and
Ireland were separate entities (at least in name), and therefore pre-dates the
merger of the Kingdoms of England and Scotland, the Kingdom of Ireland's
absorption into the Union and the formation of the present day United
Kingdom),
Bank of Canada, Bank of Mexico.
The word "Reserve" is also often included, such as
the Reserve Bank of India,
Reserve Bank of Australia,
Reserve Bank of New Zealand,
Many central banks are known as monetary authorities such as,
Saudi Arabian Monetary Authority,
Hong Kong Monetary Authority,
Monetary Authority of Singapore
Many are styled "national" banks, such as
Swiss National Bank and
National Bank of Ukraine,
Conclusion : RBI as a Central Bank :
As can be seen from above discussion, RBI performs all of the functions (and much
more) that a Central Bank of any nation performs.
Since independence, RBI has successfully managed economy of the country even
during periods when international economic crisis wracked havoc in other nations.
RTI is rightly called a Central Bank.
GO TO CONTENTS.
Module-2) Constitutional Perspectives and Regulation of Banks & Banking

Business in India :
2.1) Constitutional Perspectives relating to Banking Laws : Entries : 36, 37,

38, 43, 44, 45, 46 of List I of the Schedule VIII, Entry 30 of List II of
Schedule VIII of the Constitution of India
2.2) Bankers' Books Evidence Act : Main provisions
2.3) Banking Ombudsman System : Settlement of Disputes and complaints
relating to Banking Services
2.4) Main provisions of Banking Regulation Act, 1949
2.4.1) Regulation of Banking Companies
2.4.2) Suspension and winding up of Banking Companies
GO TO CONTENTS.
Discuss in detail : Constitutional Perspectives relating to Banking Laws : Entries :

36, 37, 38, 43, 44, 45, 46 of List I of the Schedule VIII, Entry 30 of List II of
Schedule VIII of the Constitution of India.
Explain : Main provisions of the Bankers Books Evidence Act. (Apr-2013, Apr-
2016)
Explain : Definition of bankers book and legal proceeding under the Bankers
Book Evidence Act, 1891 (Mar-2015)
Explain : Books of Banks and Legal procedure under Bankers Books Evidence Act,
1891 (Apr-2014)
Explain : Banking Ombudsman System. (Apr-2013, Apr-2016)
Explain : Settlement of disputes by Banking Ombudsman (Apr-2014, Mar-2015)
Explain the provisions to regulate the Banking Companies under the Banking
Regulations Act, 1949. (Apr-2016)
Explain the powers to regulate the Banking Companies under the Banking Regulation
Act, 1949. (Apr-2013)
Discuss under the Banking Regulation Act, 1949, (i) Restrictions on loans and
advances, (ii) About licencing to banking companies (Mar-2015)
Discuss under the Banking Regulation Act, 1949 : About licencing to Banking
companies. (Apr-2014)
Discuss under the Banking Regulation Act, 1949 : Restrictions on loans and advances.
(Apr-2014)
Discuss in detail : Suspension and winding up of Banking Companies under
Banking Regulation Act, 1949.
MODULE-2 ANSWERS :
Discuss in detail : Constitutional Perspectives relating to Banking Laws : Entries :

36, 37, 38, 43, 44, 45, 46 of List I of the Schedule VIII, Entry 30 of List II of
Schedule VIII of the Constitution of India.
ANS :
Refer :

<work on this>
GO TO CONTENTS.
Explain : Main provisions of the Bankers Books Evidence Act. (Apr-2013, Apr-
2016)
Explain : Definition of bankers book and legal proceeding under the Bankers
Book Evidence Act, 1891 (Mar-2015)
Explain : Books of Banks and Legal procedure under Bankers Books Evidence Act,
1891 (Apr-2014)
ANS :
Refer :
BANKERS BOOK EVIDENCE ACT, 1891 :
(a) The Act extends to the whole of India except the State of Jammu & Kashmir
(b) Bank and banker means
(i) any company or corporation carrying on business of banking
(ii) any partnership or individual to whose books, provision of this Act are made
applicable
(iii) any post office saving bank or money order office
(c) Bankers books include all books like ledgers, day book, cash book and all other
records used in the ordinary business of a bank.
The records can be maintained in any form such manual records, printed
computer printouts, it can be in written form or stored in a micro-film, magnetic
tape or any other form of mechanical or electronic data.
Such record can be either on site or at any off site location including a back-up
or disaster recovery site
(d) Court means the person or persons before whom a legal proceeding is held and
the judge refers to a judge of a High Court
(e) Legal proceeding refers to different types of inquiries proceedings and
investigation. Legal proceedings means (i) any proceeding or inquiry in which
evidence is or may be given (ii) an arbitration (iii) any investigation or inquiry
under Code of Criminal Procedure,1973 or under any other law as applicable for
collection of evidence, conducted by a police officer as well
(f) A certified true copy of the bank records.
Important aspects of Bankers Book Evidence Act, 1891 :
1. If the records are maintained in written form, a copy of any entry along with a
certificate certifying at the foot of such copy clearly indicating that;
(i) it is a true copy of such entry/entries
(ii) the extract is taken from one of the ordinary books of the bank
(iii) such entry was made in the ordinary course of business
(iv) such record is still in the custody of the bank
(v) if the copy was obtained by a mechanical or other process a certificate is
required for the authenticity of the information/data
Please note that each certificate mentioned above should bear date and should
be signed by the principal accountant or manager of the bank with his name and
official designation/ title
2. If the records are maintained in the electronic form (computer printouts, floppy,
disc, tapes etc.,) a copy of print out and a certificate as mentioned for the manual
records
3. If the records are maintained in mechanical form (i) a printout of any entry in
the books of a bank stored in a mechanical or electronic form, it should contain a
certificate covering all aspects discussed for manual records
Further in case the books of the bank are not written in the handwritten form, then
the copies in the form computer printout, such copy must accompany :
(a) a certificate by the principal accountant or the manager stating that it is a
printout of such entry or a copy of such printout
(b) In addition to the above another certificate by a person who is in charge of

computer furnishing a brief description of the computer system and other
particulars like (i) the safety features adopted by the bank to protect the date
integrity; (ii) prevention of unauthorized entry into the system, (iii) checks and
balancing system of verification of authenticity of input and output,(iv) if the
data is retrieved and transformed, details of control system, and (v) in case of
micro film and similar manner in which the data are stored, then the details of
the arrangement for the storage and custody of such storage systems and
practices.
In short, the certificate should be certified by the person in charge of the computer
system certifying about the integrity, accuracy and security of the computer system
and the data/ records.
A certificate of any entry in a bankers book should in all legal proceedings be
received prima facie evidence of the existence of such entry, and should be
admissible as if original is produced.
On production of certified copy, no further evidence is required. Court can order
inspection of books of accounts
GO TO CONTENTS.
Explain : Banking Ombudsman System. (Apr-2013, Apr-2016)

Explain : Settlement of disputes by Banking Ombudsman (Apr-2014, Mar-2015)
ANS :
Refer :
page-69, 159 https://www.icsi.edu/docs/webmodules/Publications/9.1%20Banking
Intro :
Banking Ombudsman Service is a grievance redressal system.
This service is available for complaints against a banks deficiency of service.
A banks customer can submit complaint against the deficiency in the service of the
banks branch and bank as applicable, and if he does not receive a satisfactory
response from the bank, he can approach Banking Ombudsman for further action.
Banking Ombudsman is appointed by RBI under Banking Ombudsman Scheme,
2006. RBI as per Sec 35 A of the Banking Regulation Act,1949 introduced the
Banking Ombudsman Scheme with effect from 1995.
Important features of Banking Ombudsman :
The Banking Ombudsman is a senior official appointed by the Reserve Bank of India
to redress customer complaints against deficiency in certain banking services.
All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-
operative Banks are covered under the Scheme.
Some of the deficiency in banking services including internet banking, covered
under the Banking Ombudsman Scheme are :
deficiency in customer service like non-acceptance, without sufficient cause, of
small denomination notes tendered for any purpose, and for charging of
commission in respect thereof;
delayed or non- payment of inward remittance, delay in issuance of drafts,
non-adherence to prescribed working hours;
refusal to open deposit accounts without any valid reason for refusal;
levying of charges without adequate prior notice to the customer;
forced closure of deposit accounts without due notice or without sufficient
reason;
refusal to close or delay in closing the accounts; etc.,
non-adherence to the fair practices code as adopted by the bank or non-
adherence to the provisions of the Code of Banks Commitments to Customers
issued by Banking Codes and Standards Board of India and as adopted by the
bank ;
non-observance of Reserve Bank guidelines on engagement of recovery agents
by banks; and any other matter relating to the violation of the directives issued
by the Reserve Bank in relation to banking or other142 PP-BL&P services.
As regards loans and advances, a customer can also lodge a complaint on the
following grounds of deficiency in service with respect to loans and advances :-
Non-observance of Reserve Bank Directives on interest rates; delays in sanction,
disbursement or non-observance of prescribed time schedule for disposal of loan
applications;
non-acceptance of application for loans without furnishing valid reasons to the
applicant; non-adherence to the provisions of the fair practices code for lenders
as adopted by the bank or Code of Banks Commitment to Customers, as the
case may be.,
Procedure for filing a complaint with the ombudsman :
One can file a complaint before the Banking Ombudsman if the reply is not received
from the bank within a period of one month after the bank concerned has received
ones representation, or the bank rejects the complaint, or if the complainant is not
satisfied with the reply given by the bank.
However a complaint will not be considered by the Ombudsman in the following

situations :
(i) The person has not approached his bank for redressal of his grievance first
(ii) The subject matter of the complaint is pending for disposal or has already
been dealt with at any other forum like court of law, consumer court etc.
(iii) The institution complained against is not covered under the scheme
(iv) The subject matter of the complaint is not within the ambit of the Banking
Ombudsman
A person can file a complaint with the Banking Ombudsman simply by writing on a
plain paper.
A person can also file it on-line or by sending an email to the Banking Ombudsman.
Note ---> For complaints relating to credit cards and other types of services with
centralized operations, complaints may be filed before the Banking Ombudsman
within whose territorial jurisdiction the billing address of the customer is located.
The complaint can also be filed by one s authorized representative (other than an
advocate).
The amount, if any, to be paid by the bank to the complainant by way of
compensation for any loss suffered by the complainant is limited to the amount
arising directly out of the act or omission of the bank or ` 10 lakhs, whichever is
lower
The Banking Ombudsman may award compensation not exceeding Rs 1 lakh to the
complainant only in the case of complaints relating to credit card operations for
mental agony and harassment.
The Banking Ombudsman will take into account the loss of the complainants time,
expenses incurred by the complainant, harassment and mental anguish suffered by
the complainant while passing such award.
The Banking Ombudsman may reject a complaint at any stage if it appears to him
that a complaint made to him is :
(i) not on the grounds of complaint referred to above compensation sought from
the Banking Ombudsman is beyond Rs 10 lakh
(ii) in the opinion of the Banking Ombudsman there is no loss or damage or
inconvenience caused to the complainant.
If one is aggrieved by the decision of Ombudsman, he/she may, within 30 days of
the date of receipt of the award, appeal against the award before the appellate
authority. The appellate authority may, if he/ she is satisfied that the applicant had
sufficient cause for not making an application for appeal within time, also allow a
further period not exceeding 30 days.
Conclusion :
Benevolent provision of Ombudsman of Banking is great relief to the customers of
banking system.
Ombudsman greatly reduces the period of waiting before resolution of complaint.
GO TO CONTENTS.
Explain the provisions to regulate the Banking Companies under the Banking
Regulations Act, 1949. (Apr-2016)
Explain the powers to regulate the Banking Companies under the Banking Regulation
Act, 1949. (Apr-2013)
ANS :
Refer :
Intro to Banking regulations :
Unlike most other regulated industries, the regulator is typically also a participant
in the market, being either a publicly or privately governed central bank. Central
banks also typically have a monopoly on the business of issuing banknotes.
However, in some countries this is not the case. In the UK, for example, the
Financial Services Authority licenses banks, and some commercial banks (such as
the Bank of Scotland) issue their own banknotes in addition to those issued by the
Bank of England, the UK government's central bank.
Banking law is based on a contractual analysis of the relationship between the bank
(defined above) and the customerdefined as any entity for which the bank agrees
to conduct an account.
Banking industry in India is mainly governed by the Reserve Bank of India Act,1934
and the Banking Regulation Act,1949.
There are other legal frame work like the Companies Act,1956,
the Negotiable Instruments Act,1881,
the Indian Contract Act,1872,
the DRT Act,1993,
the Law of Limitation,
FEMA,1999, etc. which are supplementary to the RBI Act,1934 and the BR
Act,1949.
Regulatory provisions in Reserve Bank of India Act, 1934 :

The Reserve Bank of India Act,1934 was enacted to constitute the Reserve Bank of
India with an objective to (a) regulate the issue of bank notes (b) for keeping
reserves to ensure stability in the monetary system (c) to operate effectively the
nations currency and credit system
The RBI Act covers: (i) the constitution (ii) powers (iii) functions of the Reserve
Bank of India.
The act does not directly deal with the regulation of the banking system except for
few sections like Sec 42 which relates to the maintenance of CRR by banks and Sec
18 which deals with direct discount of bills of exchange and promissory notes as
part of rediscounting facilities to regulate the credit to the banking system.
The RBI Act deals with :
(a) incorporation, capital, management and business of the RBI
(b) the functions of the RBI such as issue of bank notes, monetary control,
banker to the Central and State Governments and banks, lender of last resort
and other functions
(c) general provisions in respect of reserve fund, credit funds, audit and
accounts
(d) issuing directives and imposing penalties for violation of the provisions of the
Act
Regulatory provisions in Banking Regulation Act, 1949 :
The Banking Regulation Act, 1949 is one of the important legal frame works.
Initially the Act was passed as Banking Companies Act,1949 and it was changed to
Banking Regulation Act 1949.
Along with the Reserve Bank of India Act 1935, Banking Regulation Act 1949
provides a lot of guidelines to banks covering wide range of areas.
Some of the important provisions of the Banking Regulation Act 1949 are listed
below :
The term banking is defined as per Sec 5(i) (b), as acceptance of deposits of
money from the public for the purpose of lending and/or investment. Such
deposits can be repayable on demand or otherwise and withdraw able by means
of cheque, drafts, order or otherwise
Sec 5(i)(c) defines a banking company as any company which handles the
business of banking
Sec 5(i)(f) distinguishes between the demand and time liabilities, as the
liabilities which are repayable on demand and time liabilities means which are
not demand liabilities
Sec 5(i)(h) deals with the meaning of secured loans or advances. Secured loan
or advance granted on the security of an asset, the market value of such an
asset in not at any time less than the amount of such loan or advances. Whereas
unsecured loans are recognized as a loan or advance which is not secured
Sec 6(1) deals with the definition of banking business
Sec 7 specifies banking companies doing banking business in India should use at
least on work bank, banking, banking company in its name
Banking Regulation Act through a number of sections restricts or prohibits
certain activities for a bank. For example :
(i) Trading activities of goods are restricted as per Section 8
(ii) Prohibitions: Banks are prohibited to hold any immovable property subject
to certain terms and conditions as per Section 9 . Further, a banking company
cannot create a charge upon any unpaid capital of the company as per Section
14. Sec 14(A) stipulates that a banking company also cannot create a floating
charge on the undertaking or any property of the company without the prior
permission of Reserve Bank of India
(iii) A bank cannot declare dividend unless all its capitalized expenses are fully
written off as per Section 15.
Other important sections of Banking Regulation Act, 1949
Sections 11 and 12 deals with the Paid up Capital, Reserves and their terms and
conditions,
Sec 18 specifies the Cash Reserve Ratio to be maintained by Non-scheduled banks
and
Sec 19 (2) clarifies about the share holding of a banking company. No banking
company shall hold shares in any company, (either as pledge, or mortgagee or
absolute owners of any amount exceeding 30% of its own paid up share capital
plus reserves (or) 30% of the paid up share capital of that company whichever is
less
Section 24 specifies the requirement of maintenance of Statutory Liquidity Ratio
(SLR) as a percentage (as advised by Reserve Bank of India from time to time) of
the banks demand and time liabilities in the form of cash, gold, unencumbered
securities
GO TO CONTENTS.
Discuss under the Banking Regulation Act, 1949, (i) Restrictions on loans and
advances, (ii) About licencing to banking companies (Mar-2015)

Discuss under the Banking Regulation Act, 1949 : About licencing to Banking
companies. (Apr-2014)
Discuss under the Banking Regulation Act, 1949 : Restrictions on loans and advances.
(Apr-2014)
ANS :
Refer :
page-38, 48 https://www.icsi.edu/docs/webmodules/Publications/9.1%20Banking
Restrictions on loans and advances are :
<work on this>
(i) As per the provisions of the Banking Regulation Act, no banking company in
India can grant loans or advances against the security of its own shares
(ii) No banking company can hold shares in a company as pledge or mortgagee
in excess of the limit of 30 per cent of the Paid up capital of that company or 30
percent of the Banks Paid-up capital and Reserves, whichever is less.
No banking company can commit to grant or grant loans or advances to or on
behalf of any of its directors
(iii) Further restrictions on the loans and advance to the director as a partner,
guarantor of any loans and advances
(iv) No banking company can grant loans against (a) Fixed Deposits of other
Banks (b) Certificate of Deposits
The restrictions on different types of loans and advance may be imposed from time
to time by the Reserve Bank of India according to the requirement of the situation
as well.
Intro to New Bank Licensing Policy, 2013 :
Over the last two decades, the Reserve Bank of India (RBI) gave license to twelve
banks in the private sector.
This happened in two phases. Ten banks were licensed on the basis of guidelines
issued in January 1993.
The guidelines were revised in January 2001 based on the experience gained from
the functioning of these banks, and fresh applications were invited. The
applications received in response to this invitation were vetted by a High Level
Advisory Committee constituted by the RBI, and two more licences were issued, to
two entities, viz., Kotak Mahindra Bank and Yes Bank.
While preparing these guidelines, the Reserve Bank recognized the need for an
explicit policy on banking structure in India keeping in view the recommendations
of the Narasimham Committee, Raghuram Rajan Committee and other viewpoints.

Guidelines and important aspects :
(A) Eligible Promoters
(i) Entities/groups in the private sector that are owned and controlled by
residents [as defined in Department of Industrial Policy and Promotion (DIPP)]
and entities in public sector, are eligible to promote a bank through a wholly-
owned Non-Operative Financial Holding Company (NOFHC).
(ii) Promoters/Promoter Groups with an existing non-banking financial company
(NBFC) are eligible to apply for a bank licence.
(B) Fit and Proper criteria :
Promoters/Promoter Groups should be fit and proper in order to be eligible to
promote banks through a wholly owned NOFHC. RBI would assess the fit and
proper status of the applicants on the basis of following criteria
(a) Promoters/Promoter Groups should have a past record of sound
credentials and integrity
(b) Promoters/Promoter Groups should be financially sound and have a
successful track record of running their business for at least 10 years.
RBI may, inter alia, seek feedback on applicant Groups on these or any other
relevant aspects from other regulators, and enforcement and investigative
agencies like Income Tax, CBI, Enforcement Directorate, etc. as deemed
appropriate.
(C) Corporate structure of the NOFHC :
(i) Promoter/Promoter Group will be permitted to set up a bank only through a
wholly-owned Non-Operative Financial Holding Company (NOFHC).
(ii) The NOFHC should hold the bank as well as all the other financial services
entities of the Group regulated by RBI or other financial sector regulators. Only
non-financial services companies/entities and non-operative financial holding
company in the Group and individuals belonging to Promoter Group will be
allowed to hold shares in the NOFHC. Financial services entities whose shares
are held by the NOFHC cannot be shareholders of the NOFHC.
(iii) The general principle is that no financial services entity held by the NOFHC
would be allowed to engage in any activity that a bank is permitted to undertake
departmentally.
(iv) The NOFHC should not be permitted to set up any new financial services
entity for at least three years from the date of commencement of business of the
NOFHC. However, this would not preclude the bank from having a subsidiary or
joint venture or associate, where it is legally required or specifically permitted by
RBI.
(v) Only those regulated financial sector entities in which a Promoter Group has
significant influence or control will be held under the NOFHC.
(vi) The Promoter/Promoter Group entities/individuals associated with Promoter
Group should hold equity investment, in the bank and other financial entities
held by it, only through the NOFHC.
(vi) Shares of the NOFHC should not be transferred to any entity outside the
Promoter Group. Any change in shareholding (by the Promoter Group) with in
the NOFHC as a result of which a shareholder acquires 5 per cent or more of the
voting equity capital of the NOFHC should be with the prior approval of RBI.
(D) Minimum voting equity capital requirements for banks and shareholding by
NOFHC
(i) The initial minimum paid-up voting equity capital for a bank should be Rs 5
billion (Rs 500 crores). Any additional voting equity capital to be brought in will
depend on the business plan of the Promoters.
(ii) The NOFHC should hold a minimum of 40 per cent of the paid-up voting
equity capital of the bank which should be locked in for a period of five years
from the date of commencement of business of the bank.
(iii) Shareholding by NOFHC in the bank in excess of 40 per cent of the total
paid-up voting equity capital should be brought down to 40 per cent within three
years from the date of commencement of business of the bank.
(iv) The shareholding by NOFHC should be brought down to 20 per cent of the
paid-up voting equity capital of the bank within a period of 10 years, and to 15
per cent within 12 years from the date of commencement of business of the
bank.
(v) The capital requirements for the regulated financial services entities held by
the NOFHC should be as prescribed by the respective sectoral regulators.
The bank should be required to maintain a minimum capital adequacy ratio of
13 per cent of its risk weighted assets (RWA) for a minimum period of 3 years
after the commencement of its operations subject to any higher percentage as
may be prescribed by RBI from time to time.
On a consolidated basis, the NOFHC and the entities held by it should
maintain a minimum capital adequacy of 13 per cent of its consolidated RWA
for a minimum period of 3 years.
(vi) The bank should get its shares listed on the stock exchanges within three
years of the commencement of business by the bank.
(E) Regulatory framework :
(i) The NOFHC will be registered as a non-banking financial company (NBFC)
with the RBI and will be governed by a separate set of directions issued by RBI.
(iii) The financial entities held by the NOFHC will be governed by the applicable
Statutes and regulations prescribed by the respective financial sector regulators.
(F) Foreign shareholding in the bank :
Where foreign shareholding in private sector banks is allowed up to a ceiling of
74 per cent of the paid-up voting equity capital, the aggregate non-resident
shareholding from FDI, NRIs and FIIs in the new private sector banks should not
exceed 49 per cent of the paid-up voting equity capital for the first 5 years from
the date of licensing of the bank.
No non-resident shareholder, directly or indirectly, individually or in groups, or
through subsidiary, associate or joint venture will be permitted to hold 5 per cent
or more of the paid-up voting equity capital of the bank for a period of 5 years
from the date of commencement of business of the bank.
After the expiry of 5 years from the date of commencement of business of the
bank, the aggregate foreign shareholding would be as per the extant FDI policy.
(G) Corporate governance of NOFHC :
The NOFHC should comply with the corporate governance guidelines as issued by
RBI from time to time.
(H) Prudential Norms for the NOFHC :
The prudential norms will be applied to NOFHC both on stand-alone as well as
on a consolidated basis. Some of the major prudential norms are as under :
NOFHC on a stand-alone basis :
(a) Prudential norms for classification, valuation and operation of investment
portfolio.
(b) Prudential norms on Income Recognition, Asset Classification and
Provisioning pertaining to Advances.
(c) The NOFHC for the purpose of its liquidity management can make
investments in bank deposits, money market instruments, government
securities and actively traded bonds and debentures.
(d) The NOFHC should closely monitor its liquidity position and interest rate
risk. For this purpose, the NOFHC should prepare a structural liquidity
statement (STL) and interest rate sensitivity statement (IRS).
(e) The NOFHC may have a leverage up to 1.25 times of its paid-up equity
capital and free reserves. The actual leverage assumed within this limit should
be based on the ability of the NOFHC to service its borrowings from its
dividend income.
NOFHC on a consolidated basis :
(a) NOFHC should maintain capital adequacy and other requirements on a
consolidated basis based on the prudential guidelines on Capital Adequacy and

Market Discipline New Capital Adequacy Framework (NCAF) issued under
Basel II framework and Guidelines on Implementation of Basel III Capital
Regulations in India, when implemented.
(b) The NOFHC should prepare consolidated financial statements and other
consolidated prudential reports in terms of the Guidelines for consolidated
accounting and other quantitative methods and in terms of Scope of
Prudential Consolidation indicated under Basel III Capital Regulations.
(c) The consolidated NOFHC should adhere to the instructions on disclosure in
Financial Statements - Notes to Accounts
(d) The consolidated NOFHC should prepare a structural liquidity statement
(STL), interest rate sensitivity statement (IRS).
(I) Exposure norms :
Exposure norms are to be observed as per the guidelines of the Reserve Bank of
India from time to time.
(J) Business Plan for the bank :
(a) Applicants for new bank licenses will be required to furnish their business
plans for the banks along with their applications.
The business plan will have to address how the bank proposes to achieve
financial inclusion.
(b) The business plan submitted by the applicant should be realistic and viable.
In case of deviation from the stated business plan after issue of licence, RBI may
consider restricting the banks expansion, effecting change in management and
imposing other penal measures as may be necessary.
(K) Other conditions for the bank :
(i) The Board of the bank should have a majority of independent Directors.
(ii) Any acquisition of shares which will take the aggregate holding of an
individual/entity/group to the equivalent of 5 per cent or more of the paid-up
voting equity capital of the bank, will require prior approval of RBI.
(iii) No single entity or group of related entities, other than the NOFHC, should
have shareholding or control, directly or indirectly, in excess of 10 per cent of
the paid-up voting equity capital of the bank.
(iv) The bank should comply with the priority sector lending targets and sub-
targets as applicable to the existing domestic banks. For this purpose, the bank
should build its priority sector lending portfolio from the commencement of its
operations.
(v) The bank should open at least 25 per cent of its branches in unbanked rural
centres (population up to 9,999 as per the latest census) to avoid over
concentration of their branches in metropolitan areas and cities which are

already having adequate banking presence.
(vii) The bank should operate on Core Banking Solutions (CBS) from the
beginning with all modern infrastructural facilities.
(viii) The bank should have a high powered Customer Grievances Cell to handle
customer complaints.
(J) Procedure for RBI decisions :
Reserve Bank of India would consider many factors before issuing the licenses
for the new private sector banks.
At the first stage, the applications will be screened by RBI to ensure prima facie
eligibility of the applicants.
RBI may apply additional criteria to determine the suitability of applications, in
addition to the fit and proper criteria prescribed by it.
Thereafter, the applications will be referred to a High Level Advisory Committee
to be set up by RBI.
The High Level Advisory Committee will comprise eminent persons with
experience in banking, financial sector and other relevant areas.
The High Level Advisory Committee will set up its own procedures for screening
the application.
The Committee will submit its recommendations to RBI for consideration.
The decision to issue an in-principle approval for setting up of a bank will be
taken by RBI.
RBIs decision in this regard will be final.
The validity period of in-principal approval for setting up of a bank is 18 months.
GO TO CONTENTS.
Discuss in detail : Suspension and winding up of Banking Companies under

Banking Regulation Act, 1949.
ANS :
Refer :
http://kamkus.org/coursematerial/BANKING%20LAW%20AND%20NEGOTIABLE
%20INSTRUMENT%20ACT%20B.A.LL.B.%20VIIITH%20SEM..pdf
Brief discussion on Suspension, Winding up of a banking company :

A banking company may be amalgamated with another banking company as per BR
Act.
The banking companies have to prepare a scheme of amalgamation, the draft copy
of the scheme of amalgamation covering terms and conditions needs to be placed
separately by the companies to their shareholders.
Each shareholder needs to be given notice, The scheme of amalgamation should be
approved by a resolution passed by majority of members representing two-thirds in
value of the shareholders of each company present in person or by proxy.
A shareholder, who votes against the scheme of amalgamation and gives necessary
notice, may claim the value of his shares from the banking company, in case the
scheme is sanctioned by the Reserve Bank.
Once the scheme is sanctioned by the Reserve Bank then the assets and liabilities
of the amalgamated company pass on to the other company with which it is to be
amalgamated.
The order of the sanction of amalgamation by Reserve Bank will be the conclusive
proof of amalgamation.
In case the Central Government orders amalgamation of two companies, such
amalgamation would take place after consultation with the Reserve Bank
Under Sec 45 of the Banking Regulation Act the Reserve Bank can apply to the
Central Government for an order of moratorium in respect of any company, on
account of certain valid reasons. After considering various aspects, the Central
Government may think it fit and proper to impose the moratorium.
The period of moratorium can be extended from time to time for a maximum
period of six months.
During the period of moratorium, the banking company would not be allowed to
make any payments to the depositors or discharge any liabilities or obligations to
any other creditors unless otherwise directed by the Central Government in the
order of moratorium or at any time thereafter.
Scheme of Amalgamation :
During the period of moratorium, the Reserve Bank may prepare a scheme of
reconstruction or amalgamation.
Such a scheme may be prepared by the Reserve Bank due to any one or more of
the following aspects :
1. In the public interest
2. In the interests of the depositors
3. To secure proper management of the banking company
4. In the interest of the banking system of the country.

As per the various provisions, the scheme of amalgamation would be worked out
and implemented. A copy of the draft of the scheme should be sent to the
government and also to the banking company (transferee bank) and others
concerned with the amalgamation.
The Government may sanction with modifications as it may consider necessary,
after that the scheme should come into effect from the date of the sanction.
Once the scheme is sanctioned by the Central Government, it would be binding
on the banking company, transferee bank and the members, depositor and other
creditors and others as per the sanction.
The sanction by the Central Government is the conclusive proof that the
amalgamation or reconstruction has been carried out with the accordance with
the provisions of the relevant sections of the Act.
Consequent to amalgamation, the transferee bank should carry on the business
as required by the law.
The Central Government may order moratorium on the banking companies on
the application of the Reserve Bank.
The Reserve Bank may also apply to High Court for winding up of a banking
company when the banking company is not able to pay its debts and also in
certain other circumstances.
The High Court would decide the case based on the merits of the case a
moratorium order would be passed. After passing the order the court may
appoint a special officer to take over the custody and control of the assets,
books, etc of the banking company in the interests of the depositors and
customers.
During the period of moratorium, the Reserve Bank is not satisfied with the
functioning of the bank, and in its opinion the affairs of the banking company is
being conducted not in the interests of the depositors and customers, Reserve
Bank may apply to the High Court for winding up of the company.
Winding up by High Court :
The High Court may order winding up of a banking company on account of
(a) The banking company is unable to pay its debts
(b) An application of winding up had been made by the Reserve Bank under
the provisions of the Banking Regulation Act (Sec37 and 38)
The RBI is to make an application for winding up (under Sec 38 of BR Act) and
under Sec 35 (4) if directed by the Central Government.
Central Government may give such direction, based on the report of inspection
or scrutiny made by the Reserve Bank, and on account of the situation that the
affairs of the bank are being conducted to the detriment of the interests of the
depositors. However before giving such direction, the banking company would be
given an opportunity to make a representation in connection with the inspection/
scrutiny report.
In the following circumstances, the Reserve Bank of India can apply for winding
up of a banking company.
Non- compliance with the requirements of Sec 11 regarding minimum paid
up capital and reserves.
Prohibition to accept fresh deposits under Sec 35(4) of the Banking
Regulation Act or Sec 42 (3A)(b) of the Reserve Bank of India Act
Failure to comply with the requirements of the applicable provisions of the
Banking Regulation Act and the Reserve Bank of India Act
Official Liquidator :
Sec 38A of the Banking Regulation Act provides for appointment of an official
liquidator attached to the High Court by the Central Government, to conduct the
winding up proceedings of a banking company.
Reserve Bank as Liquidator :
If Reserve Bank of India applies to the High Court, the Reserve Bank, State Bank
or any other bank as notified by the Central Government or an individual may
also be appointed as the official liquidator.
Within the stipulated time, the liquidator is required to make a preliminary report
regarding the availability of the assets to make preferential payments as per the
provisions of the Companies Act and for discharging liabilities to depositors and
other creditors.
Within the stipulated time, the liquidator is required to give notice calling for
claims for preferential payment and other claims from every secured and
unsecured creditors.
However, depositors need not make claims. The claims of every depositor of a
banking company is deemed to have been filed for the amount as reflected in
the books of the banking standing in his/her credit.
Voluntary Winding Up :
Voluntary winding up would be permitted only when the Reserve Bank has
certified that the banking company will not be able to pay in full all its debts as
they accrue.
Detailed discussion on Suspension, Winding up of a banking company :
Suspension of Business (Sec. 37) :
The high court may, on the application of a banking company which is temporarily
unable to meet its obligations, make an order stating the commencement or
continuance of all actions and proceedings against the company for some period.
This temporary suspension of the enforcement of liability against the banking
company is called "Moratorium".
The period of "Moratorium" shall not exceed 6 months in all.
Winding-up :
Where the Reserve Bank is satisfied that the affairs of a banking company is
respect of which a moratorium order has been made, are being conducted in a
manner detrimental to the interests of the depositors, it may make an application
to the high court for winding up of the company.
Winding up of a Banking Company :
A banking company can be wound up like any other company ie. may be wound
up compulsorily or voluntarily or subject to the supervision of the court.
Winding Up by the Court :
The high court shall order the winding up of a banking company :
If the banking company is unable to pay its debts; or
If an application for its winding up has been made by the Reserve Bank.
A banking company shall be deemed to be unable to pay its debts in the following
circumstances :
a) If it has refused to meet any lawful demand made at any of its offices within two
working days, if such demand is made at a place where there is office, branch, or
agency of the Reserve bank or within five working days if such demand is made
elsewhere; and
b) If the Reserve Bank certifies in writing that the banking company is unable to
pay its debts.
Liquidator :
Sec. 38A provides for the appointment of a liquidator by the central government
who should be attached to every high court. He shall conduct all winding up
proceedings in the case of winding up of a banking company by the high court.
Notice to Preferential Claimants and Secured and Unsecured Creditors (Sec. 41 A) :
The official liquidator shall within 15 days of the winding up order of a banking
company, for the purpose of making an estimate of the debts and liabilities of the
banking company (other than its liabilities and obligations to depositors), serve a
notice on the following persons :
1. Every claimant entitled to preferential payment u/s 530 of the companies
act, 1956.
2. Every secured and every unsecured creditor.

The notice shall require each claimant to send to the official liquidator within one
month from the date of service of the notice, a statement of the amount claimed
by him.
Preferential Payment of Depositors (Sec. 43A) :
After making the adequate provisions for preferential payments, the liquidator shall
pay within 3 months, to depositors in the following order :
a) In the first place, to every depositor in the savings bank account of the
banking company a sum of two hundred and fifty rupees or the balance at his
credit, whichever is less and thereafter.
b) In the next place to every other depositor of the banking company a some
of two hundred and fifty rupees or the balance at his credit, whichever is less,
in priority to all other debts from out of remaining assets of the banking
company available for payment to general creditors.
But the sum total of the amounts paid under clause (a) and clause (b) to anyone
person who in his own name (and not jointly with any other person) is a
depositor in the savings bank account of the banking company and also a
depositor in any other account, shall not exceed the sum of two hundred and
fifty rupees.
Powers of the High Court in Voluntary Winding up (Sec. 44) :
A banking company cannot be voluntarily wound up unless the Reserve bank
certifies in writing that the company is able to pay all its debts to its creditors as
they accrues.
Where a banking company is being voluntarily wound up, the high court may :
a) make an order that the voluntary winding up shall continue but subject to the
supervision of the court, or
b) order for the winding up of the company by the high court if at any stage
during the voluntary winding up proceedings, the company is not able to meet
its debts as they accrue; or voluntary winding up cannot to continued without
detriment to the interests of the depositors.
Amalgamation of Banking Companies (Sec. 44A):
No banking company can amalgamate with another banking company unless a
scheme containing the terms of such amalgamation has been placed in draft form
before the shareholders of each of the banking companies concerned separately,
and approved by a resolution passed by a majority in number representing two
thirds in value of the shareholders of each of the said companies.
If the scheme of amalgamation is approved by the requisite majority of
shareholders in accordance with the provisions of this section. If the scheme is
sanctioned by the Reserve bank by an order in writing it shall be binding on the

banking companies concerned and also on all the shareholders thereof.
Restrictions on Compromise or Arrangement (Sec. 448):
No high court can sanction a compromise or arrangement between a banking
company and its creditors or shareholders unless the compromise or the
arrangement is certified by the Reserve bank as not being incapable of being
worked and as not being detrimental to the interest of the depositors of such
banking company.
Power of the Reserve Bank to apply to the Central government for suspension of
business by a banking company and to prepare scheme of reconstruction or
amalgamation (Sec. 45) -
The central government may, after considering the application of the Reserve Bank,
make an order of moratorium for period not exceeding six months in all.
During the period of moratorium if the Reserve Bank is satisfied that -
1. in the public interest, or
2. in the interest of depositors or
3. in the order to secure the proper management of the banking company or
4. in the interest of the banking system as a whole
it is necessary so to do, the reserve bank may prepare a scheme
i) for the reconstruction of the banking company or
ii) for the amalgamation of the banking institution with other banking
institution.
The scheme of amalgamation or reconstruction, may contain provisions for all or
any of the following matters:
a) The constitution, name and registered office, the capital, assets, powers,
rights, interests, authorities, the abilities, duties and obligation of the banking
company.
b) Any change in the Board of Directors or the appointment of a new Board of
Directors, of the banking company.
c) The alteration of memorandum and articles of association of the banking
company.
d) The continuance of the services of all the employees of the banking
company, excepting those mentioned in the scheme, at the same
remuneration and on the same term and conditions:
A copy of the scheme prepared by the Reserve Bank shall be sent in draft to the
banking company and also to the transferee bank and any other banking
company concerned in the amalgamation for suggestions and objections, if any,
within such period as the Reserve Bank may specify for this purpose.
Special Provisions for Speedy Disposal of Winding up Proceedings (Sec. 45A to 45X) :
The main provisions are as follows :
Power of the High Court to Decide all Claims (Sec. 458 and 45C) :
Where any legal proceedings are pending against the banking company in
respect of which high court has the jurisdiction, in any court on the date of the
winding up order, they will be stayed.
The official liquidator shall submit to the high court, within three months from
the date of the winding up order the details of all such pending proceedings.
On receipt of such a report the high court may give the parties concerned an
opportunity to show cause why the proceedings should not be transferred to
itself. In case the high court decides to transfer to itself the pending
proceedings, they shall be disposed of by the high court.
Settlement of the List of Debtors (Sec. 450) :
The high court may settle in, the following manner the list of debtors of a
banking company which is being wound up :
1. The official liquidator shall, within six months from the date of the winding
up order, from time to time file to the high court a list of debtors.
2. On receipt of such a list the high court shall, wherever necessary, cause
notices to be issued on all persons affected and after making an enquiry it
shall make an order settling the list of debtors.
3. At the time of settlement of any such list the high court shall pass an order
for the payment of amount due by each debtor.
4. Every such order shall, subject to the provisions for appeal, be final and
shall be deemed to be a decree in a suit.
Calls on Contributories (Sec. 45E) :
The high court may, if necessary, at any time after making a winding up order,
make a call on and order payment thereof by any contributory under Sec.
470(1) of the Companies Act, 1956, if such contributory has been placed on the
list of contributories by the official liquidator and has not appeared to dispute his
liability
GO TO CONTENTS.
Module-3) Recovery of Debt due to Banks & other Financial Institutions :
3.1) Recovery of Debt due to Banks and other Financial Institutions Act
3.1.1) Amount of Debt, who can initiate litigations ?
3.1.2) Procedure to recover Debt under the Act
3.1.3) Debt Recovery Tribunal : Constitution, Powers and Jurisdiction
3.1.4) Powers of the Recovery Officer
3.1.5) Provisions of Appeal
3.2) Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest (SARFAESI) Act, 2002
3.2.1) Objects and reasons of the act
3.2.2) Main provisions of the act
3.2.3) Issues covered under the act
GO TO CONTENTS.
Explain the provisions to recover debts due to banks and other financial institutions
under the Recovery of Debt Due to Banks and other Financial Institutions Act 1993
(RDDBFI 1993) (Apr-2013, Apr-2016)
Discuss the powers and various modes of recovery by recovery officers under the
Recovery of Debt Due to Banks and Financial Institutions Act, 1993. (Apr-2014)
Discuss under the Recovery of Debt due to Banks and other Financial Institutions
Act : Amount of Debt, who can initiate litigations ?
State the jurisdiction, powers and authorities of Debt Recovery Tribunal. (Apr-
2014)
Explain debt recovery tribunal, its constitution, powers and jurisdiction. (Mar-2015)
Act : Provisions of Appeal.
Explain in detail objects, reasons and main provisions of SARFAESI (Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)
Act, 2002). (Apr-2013, Mar-2015, Apr-2016)
MODULE-3 ANSWERS :
Explain the provisions to recover debts due to banks and other financial institutions
under the Recovery of Debt due to Banks and other Financial Institutions Act 1993
(RDDBFI 1993). (Apr-2013, Apr-2016)
Discuss the powers and various modes of recovery by recovery officers under the
Recovery of Debt Due to Banks and Financial Institutions Act, 1993. (Apr-2014)
Act : Amount of Debt, who can initiate litigations ?
State the jurisdiction, powers and authorities of Debt Recovery Tribunal. (Apr-
2014)
Explain debt recovery tribunal, its constitution, powers and jurisdiction. (Mar-
2015)
Act : Provisions of Appeal.
ANS :
Refer :
good http://www.cafral.org.in/sfControl/content/Speech/462016115856AM-
Phadnis_Prabhala_Paper_Mar_2015.pdf
page-43 http://kamkus.org/coursematerial/BANKING%20LAW%20AND
%20NEGOTIABLE%20INSTRUMENT%20ACT%20B.A.LL.B.%20VIIITH%20SEM..pdf
Introduction :
When borrowers cannot pay promised interest or principal on time, creditors can
initiate steps to recover debt. Bankruptcy laws determine the process by which
recovery proceeds.
In India, banks and financial institutions had been required to institute a suit in civil
court to proceed with recovery. The suit was tried and decided in accordance with
the procedure laid down in Civil Procedure Code (CPC), 1908 (Dubey 2013).
The CPC resolution process was long and cumbersome.
In 1981, a committee under the Chairmanship of Mr. T. Tiwari was formed to
suggest reforms. The committee observed that the Indian civil court system was
burdened with diverse types of cases. Thus, recovery of dues due to banks and
financial institutions was often not given priority.
The committee suggested other modes to recover such dues. One measure was to
set up quasi-judicial bodies to deal exclusively with the recovery process of the
financial sector. These bodies could follow a faster summary proceedings process
for disposing of cases.
However, actual action on the formation of such bodies was not initiated until about
a decade later around the Indian financial market and economic liberalization.
Background of RDDBFI Act 1993 :
In 1991, the Committee on the Financial System headed by Shri M. Narasimham
(Narasimham Committee I) endorsed the views of the Tiwari Committee and
recommended setting up Special Tribunals.
As backdrop for this recommendation, the committee noted the workload on the
court system due to defaults. As of 30 th September 1990, more than 1.5 million
cases filed by the public sector banks and 304 cases filed by the financial
institutions were pending in various courts. The recovery of debts involved more
than Rs 5,622 crore owed to public sector banks and Rs 391 crores to other
financial institutions.
The Narasimham committee recommendations led to the enactment of the
Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI), 1993.
Constitution / Establishment of Tribnal :
1) The Central Government shall, by notification, establish one or more
Tribunals, to be known as the Debts Recovery Tribunal, to exercise the
jurisdiction, powers and authority conferred on such Tribunal by or under this
Act.
2) The Central Government shall also specify, in the notification referred to in
sub-section (1), the areas within which the Tribunal may exercise jurisdiction
for entertaining and deciding the applications filed before it.
The Act established two types of agencies,
Debt Recovery Tribunals (DRTs) constituted under Section 3 of RDDBFI 1993.
and
Debt Recovery Appellate Tribunals (DRATs).
The RDDBFI Act conferred upon them special powers for adjudication of debt
recovery matters. Thus, the earliest establishment of DRTs as institutional entities
to resolve bankruptcy occurred in 1993. The first DRT was formed in Calcutta (now
Kolkata) on 27th April 1994.
Keeping in line with the international trends on helping financial institutions recover
their bad Debt quickly and efficiently, the Government of India has constituted
thirty three Debt Recovery Tribunals and five Debt Recovery Appellate Tribunals
across the country.
Definitions :
What is Debt ?
Section 2(g) of the RDDBFI Act defines debt as,
any liability (inclusive of interest) ----- which is claimed as due from any
person ----- by bank or a financial institution or by a consortium ----- in cash
or otherwise, ----- whether secured or unsecured, or assigned, or -----
whether payable under a decree or order of any civil court or any arbitration
award or otherwise or ----- under a mortgage and ----- subsisting on, and
legally recoverable on, the date of the application.
What are Banks ?
Section 2(e) of the RDDBFI Act defines banks as,
(i) banking company; (ii) corresponding new bank; (iii) State Bank of India
(iv) subsidiary bank (v) Regional Rural Bank (vi) Multi state co-operative
bank.
What are Financial Institutions ?
Section 2(h) of the RDDBFI Act defines financial institution as,
(i) a public financial institution within the meaning of Section 4A of the
Companies Act, 1956;
(ii) such other institution as the Central Government may, having regard to its
business activity and the area of its operation in India by notification, specify
Recovery Officers :
Section 2(k) of RDDBFI Act : Recovery Officer means a Recovery Officer
appointed by the Central Government for each Tribunal under sub-section (1) of
section 7;
Authorities, Composition, Qualifications, Terms of office and Removal :
Authorities under RDDBFI :
Presiding officers of DRTs,
Chairpersons of DRATs,
Recovery Officers
Composition of Tribunal :
1) A Tribunal shall consist of one person only (hereinafter referred to as the
Presiding Officer) to be appointed, by notification, by the Central Government.
2) Notwithstanding anything contained in sub-section (1), the Central
Government may authorize the Presiding Officer of one Tribunal to discharge also
the functions of the Presiding Officer of another Tribunal.
Qualifications for Appointment as Presiding Officer :
A person shall not be qualified for appointment as the Presiding Officer of a
Tribunal unless he is, or has been, or is qualified to be, a District Judge.
Term of Office :
The Presiding Officer of a Tribunal shall hold office for a term of five years from
the date on which he enters upon his office or until he attains the age of sixty-
two years, whichever is earlier.
The Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal
may by notice in writing under his hand addressed to the Central Government,
resign his office :
Recovery Officers :
1) The Central Government shall provide the Tribunal with one or more Recovery
Officers and such other officers and employees as that government may think fit.
2) The Recovery Officers and other officers and employees of a Tribunal shall
discharge their functions under the general superintendence of the Presiding
Officer.
3) The salaries and allowances and other conditions of service of the Recovery
Officers and other officers and employees of a Tribunal shall be such as may be
prescribed.
Problems with DRT :
1. Issues with large and powerful borrowers : While initially the Debts Recovery
Tribunals did perform well and helped the Banks and Financial Institutions recover
substantially large parts of their non performing assets, or their bad debts as they
are commonly known, but their progress was stunted when it came to large and
powerful borrowers.
Powerful borrowers were able to stall the progress in the Debts Recovery
Tribunals on various grounds, primarily on the ground that their claims against
the lenders were pending in the civil courts, and if the Debts Recovery Tribunal
were adjudicate the matter and auction off their properties irreparable damage
would occur to them.
2. Dues of workmen against a company, the State dues, and the dues of other non
secured creditors which all got enmeshed before the Debt Recovery Tribunals.
3. There was clash of jurisdiction between the Official Liquidators appointed by the
High Courts and the Recovery Officers of the Debts Recovery Tribunals.
The Official Liquidator, an appointee of a superior authority, took into his
possession all the properties, which actually belonged to secured creditors who
were before the Debts Recovery Tribunal.
The High Courts also took umbrage on the activities of the Recovery Officers who
away the entire amounts and paid off to the banks leaving nothing for the other
claimants, including the workmen.
4. DRT Legitimacy Questions :
Uncertainty about the legitimacy of DRTs continued for close to a half-decade.
The constitutional validity of the RDDBFI Act was challenged before the Delhi
High Court by the Delhi Bar Association.
On March 10, 1995, the Delhi High Court ruled that the RDDBFI Act was
unconstitutional because it compromised the independence of the judiciary from
the executive. The Court found other anomalies. For instance, the Court ruled
that lack of provisions for counter-claims by defendants made the Act biased
towards the creditors conferring upon debt recovery the status of a tax (Dubey
2013).
The national government moved the Supreme Court against the judgment.
On March 18, 1996, the Supreme Court issued an interim order that,
notwithstanding any stay order passed in any writ petition, DRTs should resume
function. It also asked the central government to amend the law to address
certain anomalies.
Amendments in RDDBFI Act 1993 :
All these issues lead to drastic amendments to the Recovery of Debts Due to Banks
and Financial Institutions Act by means of an amending notification in the year
2000.
The amendment made to the RDDBFI Act in 2000 allowed the defendant to make
counter claims, and also strengthened the independence of DRTs from the
executive branch of government.
On March 14, 2002, the Supreme Court stated that the RDDBFI Act with the
amendments was constitutional. At this time all the pending cases about the
constitutional validity of the act were dismissed (Visaria, 2009).
WHY SARFAESI ? Need for SARFAESI Act 2002 :
While the amending notification of 2000 did bring in some amount rationalization in
the jurisdiction of the Debts Recovery Tribunal, yet it was not sufficient to coax the
big borrowers to acquiesce to the jurisdiction of the Debts Recovery Tribunal easily.
The lenders continued to groan under the weight of the Non Performing Assets.
This led to the enactment of one more drastic act titled as the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interests Act, also
called as SARFAESI Act or SARFAESIA for short.
This new Act, the SARFAESI Act, empowered the lenders to take into their
possession the secured assets of their borrowers just by giving them notices, and
without the need to go through the rigors of a Court procedure.
Initially this brought in lot of compliance from borrowers and many a seasoned
defaulter coughed up the Bank dues. However the tougher ones punched whole in
the new Act too. This led Supreme court striking down certain provisions and
allowing the borrowers an adjudicatory forum before their properties could be
taken over by the lenders.

And this adjudicatory forum turned out to be the Debts Recovery Tribunal.
The Debts Recovery Tribunal now deals with two different Acts, namely
the Recovery of Debts Due to Banks and Financial Institutions Act, as well as
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interests Act.
While the aim of the both the Acts is one and the same, their route is different.
The Debts Recovery Tribunals have to deal with extraordinary complex commercial
laws within the narrow ambit of the two laws.
RDDBFI Act 1993
SARFAESI Act 2002
Scope and objects of DRTs and DRATs :
The original aim of the Debts Recovery Tribunal was to receive claim applications
from Banks and Financial Institutions against their defaulting borrowers.
An application for recovery of debt can be made to the DRTs for all debts valued at
more than INR 1 million. For lesser amounts, the banks and financial institutions
can avail normal remedy process such as the Civil Courts.
The Act further authorizes the Central Government to specify such other amount,
being not less than INR 1 lakh, that can be assigned to DRTs. This provision
enables rationalization and coherence with other bankruptcy legislation such as
SARFAESI that specify different amounts and that can also be taken up by DRT.
In terms of process, Section 22 (1) of the Act is the operative portion.
The Section states that the DRT and DRAT are to be guided by the principles of
natural justice.
They have powers to regulate their own procedure and in particular are not to be
bound by the procedure laid down by the former CPC.
Operationally approach to the higher courts is through writ petitions filed at the
courts.
A law degree is not necessary to argue cases before DRT.
Jurisdiction of DRTs :
Section 17 of the RDDBFI Act : A Tribunal shall exercise the jurisdiction, powers
and authority to entertain and decide applications from the banks and financial
institutions for recovery of debts due to such banks and financial institutions.
No court or other authority shall have, or be entitled to exercise, any jurisdiction,
powers or authority (except SC & HCs exercising jurisdiction under Articles 226
and 227 of the Constitution) in relation to the matters specified in section 17.
The jurisdictional powers and authority of the DRT and DRAT are set up so civil
courts do not directly intervene on the main issue on which DRTs must rule.
Jurisdiction of DRATs :
The DRAT has the power to address appeals made against any order made, or
deemed to have been made, by the DRT.
Section 18 of the Act bars all other Courts in relation to the matters of debt apart
from the Supreme Court and High Court, whose authority flows from articles 226
and 227 of the Indian Constitution.
The bottom line is that relief against a judgment of DRAT can be sought only from
the High Court and the Supreme Court.
Interventions by Lower Courts Not Entirely Precluded :
While the DRT process was designed to decongest lower courts, in practice, the
lower courts do play a role in the DRT process because the judicial powers
conferred by the RDDBFI Act on the DRT and DRAT are quite narrow.
In the judgment of the Supreme Court in the suit of Standard Chartered Bank
versus Dharmindar Bhoi and others (Civil Appeal 8486, 2013), the Court
stressed that
the DRT and DRAT can adjudicate on matters only in their domain as defined
in section 17 of this Act.
For instance, the DRTs and DRATs do not have jurisdiction on matters such as
succession rights of property, monitoring and implementation of KYC norms or
issuance of receipts.
Such issues can and do arise during the debt recovery process, e.g., to infer
security interest but the disputes on this issues can require rulings from civil
courts that have a broader jurisdiction than the DRTs and DRATs.
Thus, civil courts are approached for resolution on these matters even as they
proceed through the DRT or DRAT, delaying DRT process pending guidance
through decisions from Civil Courts.
Functions and Powers of DRTs/ DRATs :
The applicant shall, unless the Tribunal otherwise directs, specify the property
required to be attached and the estimated value thereof.
The Tribunal may make an interim order (by way of injunction or stay or
attachment) against the defendant to debar him from transferring, alienating or
otherwise disposing of, any property and assets belonging to him without the prior
permission of the Tribunal.
Where, at any stage of the proceedings, the Tribunal is satisfied, that the defendant
(with intent to obstruct or delay or frustrate the execution of any order that may be
passed against him),

(i) is about to dispose of the whole or any part of his property; or
(ii) is about to remove the whole or any part of his property from the local
limits of the jurisdiction of the Tribunal; or
(iii) is likely to cause any damage or mischief to the property/ value or
creating third party interest,
the Tribunal may direct the defendant either to furnish security for the value of
the property or to appear and show cause why he should not furnish security.
Where the defendant fails to show cause why he should not furnish security, or fails
to furnish the security required, within the time fixed by the Tribunal, the Tribunal
may order the attachment of the whole/ part of the properties claimed by the
applicant as the properties secured in his favour as appears sufficient to satisfy any
certificate for the recovery of debt.
The Tribunal may also in the order direct the conditional attachment of the whole/
part of the property.
The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging
their functions under this Act, the same powers as are vested in a civil court under
the Code of Civil Procedure, 1908, while trying a suit, in respect of the following
matters, namely,-
(a) summoning and enforcing the attendance of any person and examining him
on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents; (e)
reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default or any
order passed by it ex parte;
(h) any other matter which may be prescribed.
Power of tribunal to issue certificate of recovery in case of decree or order :
(1) Where a decree or order was passed by any court before the commencement
of the Recovery of Debts Due to Banks and Financial Institutions (Amendment)
Act, 2000 and has not yet been executed, then, the decree-holder may apply to
the Tribunal to pass an order for recovery of the amount.
(2) On receipt of an application under sub-section (1), the Tribunal may issue a
certificate for recovery to a Recovery Officer.
(3) On receipt of a certificate under sub-section (2), the Recovery Officer shall
proceed to recover the amount as if it was a certificate in respect of a debt

recoverable under this Act.
Order of DRT :
The Tribunal may, after giving the applicant and the defendant an opportunity of
being heard, pass such interim or final order, including the order for payment of
interest from the date on or before which payment of the amount is found due up
to the date of realisation or actual payment, on the application as it thinks fit to
meet the ends of justice.
Procedures to be followed by DRT/ DRAT :
The Tribunal and the Appellate Tribunal shall not be bound by the procedure laid
down by the Code of Civil Procedure, 1908, but shall be guided by the principles of
natural justice and, subject to the other provisions of this Act and of any rules, the
Tribunal and the Appellate Tribunal shall have powers to regulate their own
procedure including the places at which they shall have their sittings.
Any proceeding before the Tribunal or the Appellate Tribunal shall be deemed to be
a judicial proceeding within the meaning of sections 193 and 228, and for the
purposes of section 196 of the Indian Penal Code, and the Tribunal or the Appellate
Tribunal shall be deemed to be a civil court for all the purposes of section 195 and
Chapter XXVI of the Code of Criminal Procedure, 1973.
Transfer of Pending Cases :
Every suit/ proceeding pending before any court immediately before the date of
establishment of a Tribunal under this Act, being a suit/ proceeding the cause of
action whereon it is based is such cause of action that it would have been, if it had
arisen after such establishment, within the jurisdiction of such Tribunal, shall stand
transferred on that date to such Tribunal.
Protection of action taken in good faith :
No suit, prosecution or other legal proceeding shall lie against the Central
Government or against the Presiding Officer of a Tribunal or the Chairperson of an
Appellate Tribunal or against the Recovery Officer for anything which is in good
faith done or intended to be done in pursuance of this Act or any rule or order
made thereunder.
DRT process : There are two routes to approach DRTs, through direct application or
through the SARFAESI route.
Direct Application route :
Figure below provides a visual depiction of the entire DRT process :
The recovery procedure under this route is invoked by making an application to

(and not filing a suit with) the DRT and paying the prescribed fees.
There are currently 32 DRTs in India in 22 unique locations. Some cities have
multiple DRTs to deal with the inflow of large number of filings of applications.
Section 19 of the RDDBFI Act specifies the conditions for choice of DRT to make
an application. An application can be made by the bank or financial institution to
a DRT that has jurisdiction in the region where the defendant (one or more
defendants, if more than one) actually or voluntarily resides, or carries business.
An application may also be filed to a particular DRT if the cause of action wholly
or in part arises within the limits of its jurisdiction.
SARFAESI route :
Figure below illustrates the SARFAESI route to debt recovery :
An application can also be made to the DRT under the Securitisation and
Reconstruction for Enforcement of Security Interest Act (SARFAESI), 2002.
Under section 13 (2) of the SARFAESI Act, after a loan has been classified as a
non-performing asset (NPA) by the secured creditor, a notice to this effect is sent
to the relevant borrower.
Appeal against Section 13 (2) notice :
Under section 3A of SARFAESI Act borrower gets right to appeal against 13(2)
notices. Note that, this appeal can be made to the secured creditor alone. The
bank is expected to respond to the appeal of the borrower within fifteen days.
Section 13 (2) notice must clearly mention the outstanding amount to be repaid
in full within a period of 60 days by the borrower, failing which the secured
creditor is entitled to exercise the rights in accordance with section 13 (4) of the
Act.
If the borrower is unable to discharge his liabilities, section 13 (4) of the Act
authorizes the secured creditor to take recourse to measures of recovery by
taking possession of the secured asset including the right to transfer by way of
lease, assignment or sale, take over management of the business or appoint any
person to manage the secured asset.
Application to the DRT by creditors : The transition into DRTs occurs when
collateral is insufficient to fulfill obligations to creditors. In such instances where
dues of the secured creditors are not fully satisfied with the sale proceeds of the
secured assets, the creditors may file an application to the DRT for recovery of
the remaining portion of the dues.
Appeal to the DRT by borrower : The borrower can also appeal to the DRT
against the creditors findings. As per Section 17 of the SARFAESI Act, borrowers
can appeal against any action taken by the creditor under section 13 (4). After
2004 amendments, appeal to the DRT can be filed by paying only the fees
prescribed by the RDDBFI Act, which are applicable to all applications made to
the DRT.
Prior to 2004, transitions from SARFAESI into DRTs were extremely costly for
borrowers. An appeal could be made to the DRT by the borrower only after
depositing 75% of the amount specified in the notice issued under section
13(2).
Adjudication by DRT :
To expedite court processes, adjudication by DRTs and DRATs is by summary
proceeding.
The powers of the tribunal are quite substantial. Section 19 (12) of the Act
empowers the DRT to make an interim order against the defendant to debar him
from disposing or transferring any property and assets belonging to him without
prior permission of the Tribunal.
It also has the power to detain the defendant for a maximum of three months for
disobedience of an order or breach of any terms of an order issued under sections
19(12), 19(13) and 19(18) of the SARFAESI Act.
Time limit for disposal :
In the direct application route, the recommended time to completion is 180 days
from the receipt of the application as per Sections 19(4) of RDDBFI.
For applications made to DRT under the SARFAESI Act, DRTs are asked to
dispose cases within 60 days, with an outer limit of 4 months. If the period
exceeds 4 months section 17(6) of the SARFAESI Act entitles either party to the
application to make an application to the DRAT to direct the DRT for disposal of
the pending application.
The submission of an application to the DRT triggers, summons issued to the
defendant requiring him to show cause within 30 days as to why relief prayed for
should not be granted.
The defendant must present a written statement. The Tribunal may permit
additional time for submission of this statement.
The defendant can plead a set-off against any ascertained sum of money legally
recoverable by him from the applicant at the first hearing and not afterwards
unless permitted by the Tribunal.
A counter-claim against the claim of the applicant can be made by the applicant
before delivering his defense.
On the basis of the DRTs order, the Presiding Officer of the DRT issues a certificate
to the Recovery Officer for recovery of the amount of debt specified in the
certificate. The Recovery officer can recover dues by attaching, selling and
appointing a receiver for the management of the defendants property.
The DRTs can also obtain a police warrant to arrest the defendant (Visaria, 2009).
Adjudication by DRAT :
An appeal against the order of the DRT can be made to the DRAT within whose
jurisdiction the DRT falls.
There are currently 5 DRATs in Mumbai, Delhi, Kolkata, Chennai, and Allahabad.
The appeal has to be made within a period of 45 days from the order of the DRT,
which may be extended by the DRAT.
Additionally, the DRAT can be approached for interim relief on interim applications
(IA) or miscellaneous applications (MA) which are sub-sections of the original
applications.
Appeals to DRAT can be expensive. The aggrieved party that owes the debt must
deposit 75% of the amount determined by the order of the DRT. This amount can
be reduced or waived by the DRAT.
For appeals to DRAT that originate in the SARFAESI Act actions, the deposit is 50%
of the amount which is claimed by the secured creditor or the amount as
determined in the order of DRT or the, whichever is less.
However an important point is that unlike applications under RDDBFI, the deposits
cannot be fully waived but only be reduced to 25% of the amount.
Conclusion :
Over the years the Debts Recovery Tribunals have evolved into fine bodies with lot
of expertise. There is a plethora of judgments from the Supreme Court as well as
the various High Courts which have paved the way of the Debts Recovery Tribunals
to chart their courses.
The Debts Recovery Tribunal of India have become model institutions for many a
country to follow.
GO TO CONTENTS.
Explain in detail objects, reasons and main provisions of SARFAESI (Securitization

and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)
Act, 2002). (Apr-2013, Mar-2015, Apr-2016)
ANS :
Refer :
Intro :
Like the DRT process, the SARFAESI Act was also based on the recommendations of
committees, specifically the Narasimham Committee II (1998) and the
Andhyarujina Committee (1999).
These committees recognized the need to strengthen the rights of secured
creditors to assist them in recovering their dues.
SARFAESI sets out the process for doing so without the intervention of courts or
tribunals.
Objectives :
The objective of enactment of the SARFAESI ACT was to regulate securitization and
reconstruction of financial assets and the enforcement of security interest and for
the matters connected therewith or incidental thereto.
Scope of the Act :
The Act covers;
Any financial assistance which is due (principle debt or any other amount
payable)
The right of security enforcement is for a default committed by the borrower,
and the creditor is a secured creditor. In other words, any unsecured creditor has
no right under this Act
The debt should be classified by the bank as Non- Performing Asset
The Act is applicable only in case of a Non Performing Asset (NPA) of a borrower
classified by a bank or financial institution as sub-standard, doubtful or a loss asset
as per the RBIs guidelines.
Definitions :
Bank :
All the banking companies, Nationalised banks, the State Bank of India and its
subsidiary banks, Regional Rural Banks, co-operative banks etc.
Borrower:
(i) any person who has availed financial assistance from a bank and/or financial
institution
(ii) any person who has given guarantee
(iii) any person who has created any mortgage or pledge as a security for the
financial assistance granted by any bank or financial institution
(iv) any person who becomes the borrower of a securitization company or
reconstruction company, because the company has acquired any interest or right
of any bank or financial institution, on account of financial assistance granted to
a borrower
Central Registry :
The register office set up by the Central Government for the purpose of
registration of all the transactions of asset securitization, reconstruction and
transactions of creation of security interests.
The registration system will operate on a priority of registration basis, i.e., first
come first served basis the first person who registers gets priority over the
persons who registers at a later date.
Financial assistance : Whenever any bank or financial institution allows a borrower;
(i) to avail of a loan or advance
(ii) makes subscription of debenture or bonds
(iii) issues a letter of credit
(iv) issues letter of credit
(v) extends any other credit facility,
it is called financial assistance.
Financial Asset : Financial asset means debt or receivables and includes:
(a) any debt or receivable secured by mortgage of or charge in immovable
property or
(b) a claim to any debt or receivables or part thereof whether secured or
unsecured or
(c) any charges like a mortgage, hypothecation or pledge of moveable property
or
(d) any right or interest in the security, whether full or part, securing debt
(e) any beneficial interest in any movable or immovable property or in debt,
receivables whether is existing, future, accruing, conditional or contingent or
(f) any other financial assistance
hypothecation :
A charge in or upon any movable property (existing or future) created by a
borrower in favour of a secured creditor.
Reconstruction company :
Company formed for the purpose of asset reconstruction and registered under
the Companies Act,1956 is called Reconstruction company.
Brief discussion on SARFAESI process :
Under section 13 (2) of the SARFAESI Act, after a loan has been classified as a
non-performing asset (NPA) by the secured creditor, a notice to this effect is sent
to the relevant borrower.
This notice must clearly mention the outstanding amount to be repaid in full within
a period of 60 days by the borrower, failing which the secured creditor is entitled to
exercise the rights in accordance with section 13 (4) of the Act.
While the initial versions of the Act gave borrowers no rights to appeal against this
notice, a later version introduced Sub-section 3A into SARFAESI Act to allow
borrower appeals against 13(2) notices.
Note that, this appeal can be made to the secured creditor alone.
The bank is expected to respond to the appeal of the borrower within fifteen
days.
If the borrower is unable to discharge his liabilities, sub-section 4 of section 13 of
the Act authorizes the secured creditor to take recourse to measures of recovery by
taking possession of the secured asset including the right to transfer by way of
lease, assignment or sale, take over management of the business or appoint any
person to manage the secured asset.
Detailed discussion on SARFAESI process / important aspects :

This Act is popularly called as Securitization Act
This Act empowers the banks and financial institutions to recover their dues in Non-
Performing Asset (NPA) accounts, without the intervention of a court
This Act also empowers the banks and financial institutions to issue notice for
recovery from the defaulting borrowers and guarantors, calling upon them to
discharge the dues in full within 60 days
In case the borrower and/or guarantor fails to comply with the 60 days notice
issued by the bank or financial institution in repayment of full dues, then the bank
and/or financial institution can :
(a) Take the possession or the management of secured assets of the borrower,
and also can transfer the same by way of lease, assignment or sale for realizing
the secured assets without the intervention of a court/ DRT.
(b) Appoint any person to manage the secured assets which have been taken
over by the secured creditor (bank)
(c) Also instruct at any time by a notice in writing to a person
who holds secured assets of the borrower
from whom any money due or becoming due to the borrower
to pay such money to the secured creditor (bank)
The Act covers three important aspects viz.,
(1) Securitization
(2) Reconstruction of Financial assets and
(3) Enforcement of security interest
Detailed discussion of above three aspects shall follow ;
(1) Securitization :
Securitization is the process of acquisition of financial asset by the securitization
or reconstruction company from the lender (bank or financial institution) The
reconstruction or securitization company may be raising funds for acquisition of
financial asset from the qualified institutional buyers by issue of security receipts
representing undivided interest in the financial assets or otherwise.
Security Receipt :
A receipt or another security issued by a securitization company or
reconstruction company to any qualified institutional buyer.
The receipt is an evidence of purchase or acquisition by the holder thereof of
an undivided right, title or interest in the financial asset involved in
securitization is called the security receipt.
The security receipts are transferable in the market.
SARFAESI Act made the loans secured by mortgage or other charges
transferable.
(2) Reconstruction of Financial assets :
An asset reconstruction companys role is to takeover loans or advances from the
bank or financial institution for the purpose of recovery.

In other words any securitization company or reconstruction company acquires
any right or interest of any bank or financial institution, in any financial
assistance for the purpose of realization of such financial assistance it is called as
asset reconstruction.
On acquisition of a financial asset, the securitization or reconstruction company
becomes the owner of the financial asset and steps into the shoes of the lender
bank or financial institution.
This acquisition can also said to be, as a sale of asset without recourse to the
bank or financial institution.
The regulatory authority for all securitization or reconstruction companies is the
Reserve Bank of India.
It is a company registered under the Companies Act,1956 for the purpose of
securitization and it also requires a registration from the RBI as per the
SARFAESI Act.
(3) Enforcement of Security Interest :
The Enforcement of security interest is important for recovery of the banks bad
loans. The special feature of the Act is that the security interest can be enforced
without intervention of the courts, subject to certain procedures to be followed,
like 60 days notice has to be served by the bank on the borrower with a request
to discharge the loan liability. In case If borrower fails to discharge the liability,
secured creditor can take possession of secured asset or other actions as per the
provisions of the Act.
Security Interest :
Any right, title and interest of any kind of the property created in favour of
any secured creditor is called as security interest.
It includes any secured creditor is called as security interest.
Whenever any lender takes any security from the borrower the lender gets
interest in that security.
While taking possession of the asset various precautions are required to be
taken and if required the help of the Chief Metropolitan Magistrate or District
Magistrate can be taken.
Special features : Under certain circumstances properties cannot be attached,
such as,
(i) any security interest securing repayment of any financial assistance not
exceeding Rs 1 lakh.
(ii) Security interest not registered under this Act.
(iii) Any security interest created in agricultural land.

(iv) A pledge of movables as per Sec 172 of the Indian Contract Act.
No civil court has any jurisdiction under this Act. The Indian Limitation Act,
1963 is applicable to this Act.
Central Registry :
The Central registry is set up for registration of securitization and
reconstruction transaction and creation of security interest. Registration under
other Acts like;
Registration Act, 1908
Companies Act, 1986
Patents Act, 1970
Motor Vehicles Act, 1988.
The registration under the SARFAESI Act is in addition to the respective
registrations required in the above mentioned acts and/or any other Act.
The following items require registration under the SARFAESI Act :
Securitization of financial assets
Reconstruction of financial assets
Creation of security interests
The central registry record can be kept fully or partly on electronic form
Filing :
Details of securitization, reconstruction, creation of security interests is to be
filed with the central registrar.
The details in the prescribed form should be filed within thirty days after the
date of transaction or the creation of security, by the securitization company,
or the reconstruction company or the secured creditor.
The prescribed fees are applicable for registration. The delay if any can be
condoned by the central registrar for a period of next thirty days after the first
thirty days prescribed subject to payment of fees as required.
Modifications :
In case of modification of details registered with the central registrar, the
modification also needs to be filed before the central registrar by the
securitization company, or the reconstruction company or the secured
creditor.
The time period for modification is also like that of registration, i.e., the
modification will have to be filed within thirty days in the prescribed forms
with prescribed fees. The delay if any can be condoned by the central
registrar for a period of next thirty days after the first thirty days prescribed
subject to payment of fees as required.
The security interest registered with the central registrar is required to be
satisfied on the payment of full amount by the borrower.
The securitization company, or the reconstruction company or the secured
creditor as the case may should report the satisfaction, within thirty days of
payment in full or satisfaction of the charge.
On receipt of the satisfaction charge the central registrar is required to cause a
notice to be issued to the securitization company, or the reconstruction company
or the secured creditor, calling upon to show cause within a period of fourteen
days as to why the payment or satisfaction should not be recorded as intimated.
If no cause is shown as required then the central registrar has to order that the
memorandum of satisfaction should be entered in the central register.
If any cause is shown accordingly a noting is recorded in the central register and
should inform to the borrower accordingly.
Taking possession of property mortgaged / hypothecated to banks :
In a recent case Supreme Court has observed that we are governed by rule of
law in the country and the recovery of loans or seizure of vehicles could be
done only through legal means.
In this connection it may be mentioned that the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act) and the Security Interest (Enforcement) Rules, 2002
framed there under have laid down well defined procedures not only for
enforcing security interest but also for auctioning the movable and immovable
property after enforcing the security interest.
It is, therefore, desirable that banks rely only on legal remedies available
under the relevant statutes which allow the banks to enforce the security
interest without intervention of the Courts.
Where banks have incorporated a re-possession clause in the contract with
the borrower and rely on such re-possession clause for enforcing their rights,
they should ensure that such repossession clause is legally valid, is clearly
brought to the notice of the borrower at the time of execution of the contract,
and the contract contains terms and conditions regarding
notice period to be given to the customers before taking possession
the procedure which the bank would follow for taking possession of the
property and
the procedure which the bank would follow for sale / auction of property.
This is expected to ensure that there is adequate upfront transparency and
the bank is effectively addressing its legal and reputation risks.

Transition of SARFAESI into DRTs :
Transition into DRTs occurs when collateral is insufficient to fulfill obligations to
creditors.
Application to the DRT by creditors : The transition into DRTs occurs when
collateral is insufficient to fulfill obligations to creditors. In such instances where
dues of the secured creditors are not fully satisfied with the sale proceeds of the
secured assets, the creditors may file an application to the DRT for recovery of
the remaining portion of the dues.
Appeal to the DRT by borrower : The borrower can also appeal to the DRT
against the creditors findings. As per Section 17 of the SARFAESI Act, borrowers
can appeal against any action taken by the creditor under section 13 (4). After
2004 amendments, appeal to the DRT can be filed by paying only the fees
prescribed by the RDDBFI Act, which are applicable to all applications made to
the DRT.
Prior to 2004, transitions from SARFAESI into DRTs were extremely costly for
borrowers. An appeal could be made to the DRT by the borrower only after
depositing 75% of the amount specified in the notice issued under section
13(2).
GO TO CONTENTS.
*** End-of-Compilation ***

Source : Public domain print/ internet contents.
URLs of some such resources are listed herein above.
Credits/ copyrights duly acknowledged.
Suggested Reading :
Recovery of Debt. Due to Bankers and Financial Institutions Act, 1993 Asia Law House
Ltd.
Banking Regulation Act, 1949
Reserve Bank of India Act, 1935
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act
M.L. Tannen, Tennens Banking Law and Practice in India India Law House, New Delhi
S.N. Gupta, The Banking Law in Theory and Practice, Universal New Delhi

213F Principles of Banking Laws

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Module-1) Origin and Development of Banking System :

Module-2) Constitutional Perspectives and Regulation of Banks & Banking

Module-3) Recovery of Debt due to Banks & other Financial Institutions :

Module-1) Origin and Development of Banking System :

1.1) Evolution of Banking Institutions, Origin of world Bank

Discuss in detail : Evolution of Banking Institutions, Origin of world Bank.

Discuss in detail : Evolution of Banking Institutions, Origin of world Bank.

contains a statutory definition of the term banker :

Origin of modern banking :

Urban Cooperative Banks

Detailed discussion on outline of Types of banks : The Indian banking sector is

scheduled and non-scheduled commercial banks which are regulated under

Explain : Nationalization of Banks in India and effect thereof (Apr-2013, Mar-2015)

owned by lower levels of government, such as municipalities, being transferred to

91% of the banking business of India.

farmers, and mortgages.

Annual Lending 17,603.42 Cr

Discuss : Multi functional Banks.

Explain : State the distinction between Commercial and Co-operative Banks

Explain : Agricultural Banks and their requirements. (Apr-2013, Apr-2014, Apr-

changing the Bank rate or through open market operations.

11. Transferring Money from Place to Place :

for returns and necessary information from them.

Module-2) Constitutional Perspectives and Regulation of Banks & Banking

2.1) Constitutional Perspectives relating to Banking Laws : Entries : 36, 37,

Discuss in detail : Constitutional Perspectives relating to Banking Laws : Entries :

Discuss in detail : Constitutional Perspectives relating to Banking Laws : Entries :

(b) In addition to the above another certificate by a person who is in charge of

Explain : Banking Ombudsman System. (Apr-2013, Apr-2016)

However a complaint will not be considered by the Ombudsman in the following

Regulatory provisions in Reserve Bank of India Act, 1934 :

advances, (ii) About licencing to banking companies (Mar-2015)

of the Narasimham Committee, Raghuram Rajan Committee and other viewpoints.

consolidated basis based on the prudential guidelines on Capital Adequacy and

concentration of their branches in metropolitan areas and cities which are

Discuss in detail : Suspension and winding up of Banking Companies under

Brief discussion on Suspension, Winding up of a banking company :

4. In the interest of the banking system of the country.

2. Every secured and every unsecured creditor.

sanctioned by the Reserve bank by an order in writing it shall be binding on the

Module-3) Recovery of Debt due to Banks & other Financial Institutions :

taken over by the lenders.

passed against him),

proceed to recover the amount as if it was a certificate in respect of a debt

The recovery procedure under this route is invoked by making an application to

Explain in detail objects, reasons and main provisions of SARFAESI (Securitization

Detailed discussion on SARFAESI process / important aspects :

bank or financial institution for the purpose of recovery.

(iii) Any security interest created in agricultural land.

the bank is effectively addressing its legal and reputation risks.

*** End-of-Compilation ***

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* End-of-Compilation *