M.

COM- 4th Semester

I.K.Gujral Punjab Technical University

Master of Commerce Batch 2018 Onwards
MCOPBI 421-18
Banking Laws

Course objective : The course aims at imparting knowledge and equip

students with different laws which are related to Indian Banking Industry.
This knowledge will help the students to understand the laws related to
modern banking system as well as establish link between the legal
provisions and the practical aspects of banking.

Unit I
Banking Regulation Act, 1949:- Concept of Bank and Banker, Functions of
Banks, Classification of Banks, Relationship between Bank and Customer,
Control by government and it agencies, Management of Banking companies,
On account and audit, Reconstruction and reorganization of banking
companies, Suspension and winding up of business of banking companies,
Social control over banking, Banking.

Unit II
The Negotiable instrument Act, 1881:- Definition and characteristic of
Negotiable Instruments, Types of Negotiable Instruments, Definition and
Essentials of Promissory Note, Bill of Exchange and Cheque, Liabilities and
Capacity of Parties of Negotiable Instrument, Holder and Holder in due
course, Transfer and Negotiation of Negotiable Instrument. Crossing of
Cheques and payment, Dishonor of Cheques, Presentment and Payment,
Dishonor, .Noting and Protest of Negotiable Instrument, Endorsement:
Definition, Essential of a valid endorsement and its kinds, Rules of evidence
and compensation.
Unit III
The Reserve Bank of India Act, 1934:- Incorporation, Capital,
Management and Business of Banking Company, Central Banking function
of Reserve Bank of India, Collection and furnishing of Credit Information,
Control of Reserve Bank of India over Non-banking Institutions and
Financial Institutions, Credit Control by Reserve Bank of India, Changing
role of the RBI.

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Unit IV
Law of Limitation - Provisions of Bankers Book Evidence Act -Special
Features of Recovery of Debts Due to Banks and Financial Institutions Act,
1993, TDS Banking Cash Transaction Tax Service Tax, Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002: Asset Reconstruction Companies, The Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002, Banking Ombudsman Lok Adalats, Lender’s Liability Act.

INDEX
SR.
NO. TOPICS
UNIT-I
Banking Regulation Act, 1949:- Concept of Bank and Banker, Functions of Banks,
1 Classification of Banks,Relationship between Bank and Customer.
2 Control by government and it agencies.
3 Management of Banking companies.
4 On account and audit.
5 Reconstruction and reorganization of banking companies.
6 Suspension and winding up of business of banking companies.
7 Social control over banking.
8 Important Questions

UNIT-II
The Negotiable instrument Act, 1881:- Definition and characteristic of Negotiable
Instruments, Types of Negotiable Instruments, Definition and Essentials of Promissory Note,
9 Bill of Exchange and Cheque, Liabilities and Capacity of Parties of Negotiable Instrument,
10 Holder and Holder in due course, Transfer and Negotiation of Negotiable Instrument.
Crossing of Cheques and payment, Dishonor of Cheques, Presentment and Payment,
11 Dishonor, Noting and Protest of Negotiable Instrument,
Endorsement: Definition, Essential of a valid endorsement and its kinds, Rules of evidence
12 and compensation.
13 Important Questions.

UNIT-III

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The Reserve Bank of India Act, 1934:- Incorporation, Capital, Management and Business
14 of Banking Company, Central Banking function of Reserve Bank of India
Collection and furnishing of Credit Information, Control of Reserve Bank of India over Non-
15 banking Institutions and Financial Institutions,
16 Credit Control by Reserve Bank of India, Changing role of the RBI.

17 Important Questions.

UNIT-IV
Law of Limitation - Provisions of Bankers Book Evidence Act -Special Features of Recovery
18 of Debts Due to Banks and Financial Institutions Act, 1993,
19 TDS Banking Cash Transaction Tax Service Tax,
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002: Asset Reconstruction Companies, The Securitization and Reconstruction
20 of Financial Assets and Enforcement of Security Interest Act, 2002,
21 Banking Ombudsman Lok Adalats, Lender’s Liability Act.
22 Important Questions.

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UNIT-I

BANKING REGULATION ACT, 1949

 Meaning of Banking

Banking means transacting business with a bank; depositing or

withdrawing funds or requesting a loan etc.

The development of banking is evaluation in nature. The origin of the word

bank can be traced back to the German word „Banck‟ and Italian word
„Banco‟ which means heap of money. Banking is an old concept in India. It
was present in ancient Vedic times. There were bankers known as „Sheth‟,
„Shah‟, „Shroff‟ or „Chettiar‟ who were performing the function of bank.

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Definition:- “Accepting for the purpose of lending & investment, of deposit
of money from the public, repayable on demand order or otherwise and
withdraw able by cheque, draft or otherwise.”

 Functions of banks

The main functions of banks are accepting deposit and lending loans:

A – accepting deposits

1. Fixed deposits:- These deposits mature after a considerable long period

like 1 year or more than that the rate of interest is fixed the amount
deposited cannot be withdrawn before maturity date.

2. Current A/C deposit:- These are mainly maintain by business

community to facilitate frequent transaction with big amounts. Generally no
rate of interest or very low rate of interest is paid on this account.

3. Savings bank A/C:- It is kind of demand deposits which is generally kept

by the people for the sake of safety. These facility is given for small saver
and normally a small rate of interest is paid.

4. Recurring deposit A/C:- In case of recurring deposit the fixed amount is

deposited in a bank every month for a fixed period of time.

B-Lending loans

1. Call loans:- These loan are called back at any time. Normally, this loans
are taken by bill brokers or stock brokers.

2. Short term loans:- These are sanctioned for a period up to 1 year.

3.Medium term loans:- These are sanctioned for the period varying
between 1 and 5 years.

4. Long term loans:-These loan are sanctioned for a period of more than 5
years it includes:

1. Overdraft:- The bank grants overdraft facility to its reliable and

respectable depositors. It enables companies, firms and businessmen to
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withdraw amount over and above their actual balance in their current
account.

2. Cash credit: Under this facility, the bank allows the borrower to
withdraw cash against certain security.

3. Bills of Exchange:- The bank provide funds to their customers by

purchasing or discounting bills of exchange. The bank charges commission
up to the maturity period of bills.

 The main functions, the banks also provide financial services to

the corporate sector and business and society. They are as
follows:

1.Merchant Banking:- Merchant banking is an organization which

underwrites securities for companies, advises in various activities. No
person is allowed to carry out any activity as a Merchant Banker unless
holds a certificate granted by SEBI. Thus, merchant banks are financial
institutions which provide specialized services including acceptance of bills
of exchange, corporate finance, portfolio management and other services.

2. Leasing:- Banks have started funding the fixed assets through leasing. It
refers to the renting out of immovable property by the bank to the
businessmen on a specified rent for a specific period on terms which may
be mutually agreed upon. A written agreement is made in this respect.

3.Mutual funds:- The main function of mutual fund is to mobilize the

savings of the general public and invest them in stock market and money
market.

4. Venture Capital (VC):-Venture Capital is financial capital provided to

early-stage, high-potential, high risk, growth startup companies. The
venture capital fund makes money by owning equity in the companies it
invests in, which usually have a novel technology or business model in high
technology industries, such as biotechnology, IT, software, etc.

5. ATM:- An ATM is also known as cash point. The banks nowadays provide
ATM facilities. The customers can withdraw money easily and quickly 24
hours a day.
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6. Telebanking:- Telebanking is a throwback to the days when people
would call into a central number at their bank/financial institution in order
to get balance, check status and other account-related information. Most
financial organizations offer telebanking services today; however, the
public representation is known as telephone-based customer service or just
customer service.

7. Credit cards:- Credit cards allow a person to buy goods and services up
to a certain limit without immediate payment. The amount is paid to the
shops, hotel, etc. by the commercial banks. 8. Locker Service:- Under this
service, lockers are provided to the public in various sizes on payment of
fixed rent. Customers can deposit their valuables, documents, jewellery,
securities, etc. in these lockers.

8. Underwriting:- This facility is provided to the joint stock companies and

to the government. The banks guarantee the purchase of certain proportion
of shares, if not sold in the market.

 Types of Banks

1. Commercial Banks:-These banks play the most important role in

modern economic organisation. Their business mainly consists of receiving
deposits, giving loans and financing the trade of a country. They provide
short-term credit, i.e., lend money for short periods. This is their special
feature.

2. Exchange Banks:-Exchange banks finance mostly the foreign trade of a

country. Their main function is to discount, accept and collect foreign bills
of exchange. They also buy and sell foreign currencies and help
businessmen to convert their money into any foreign money they need.
Their share in the internal trade of a country is usually small. In addition,
they carry on ordinary banking business too.

3. Industrial Banks:-There are a few industrial banks in India. But in some

other countries, notably Germany and Japan, these banks perform the
function of advancing loans to industrial undertakings. Industries require
capital for a long period for buying machinery and equipment. Industrial
banks provide this type of Mock capital. Industrial banks have a large
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capital of their own. They also receive deposits for longer periods. They are
thus in a position to advance long-term loans.

In India, the Central Government set up an Industrial Finance Corporation

of India (IFC1) in 1948. Its activities have since then been greatly enlarged.
Further the States have also set up State Financial Corporations. The Central
Government has also established the Industrial Credit and Investment
Corpor-ation of India (ICICI) and the National Industrial Development
Corporation for the financing and promotion of industrial enterprises. In
1964 the Industrial Development Bank of India (1DBI) was established as
the apex or top term-lending institution. These new institutions fill
important gaps in our system of industrial finance.

4. Agricultural or Co-operative Banks:-The main business of agricultural

banks is to provide funds to farmers. They are worked on the co-operative
principle. Long-term capital is provided by land mortgage banks, nowadays
called land-development banks, while short-term loans are given by co-
operative societies and co-operative banks. Long-term loans are needed by
the farmers for purchasing land or for permanent improvements on land,
while short-period loans help them in purchasing implements, fertilizers
and seeds. Such banks and societies are doing useful work in India.

5. Savings Banks:-These banks (perform the useful service of collecting

small savings. Commercial banks too run “savings departments” to mobilise
the savings of men of small means. The idea is to encourage thrift and
discourage hoarding. Post Office Saving Banks in India are doing this useful
work.

6. Central Banks:-Over and above the various types of banks mentioned

above, there exists in almost all countries today a Central Bank. It is usually
controlled and quite often owned by the government of the country.

7. Utility of Banks:-An efficient banking system is absolutely necessary for

a country, if it is to progress economically. The services that an efficient
banking system can render a country are indeed very valuable.
Undeveloped banking system is not only an index of economic
backwardness of a country; it is also an important cause of it. The banking

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system can be useful in the following ways, in addition to what has been
mentioned in the functions of banks.

 Role of Commercial banks in economic development of a country

1. Capital Formation:-Banks play an important role in capital formation,

which is essential for the economic development of a country. They
mobilize the small savings of the people scattered over a wide area through
their network of branches all over the country and make it available for
productive purposes.

Now-a-days, banks offer very attractive schemes to attract the people to

save their money with them and bring the savings mobilized to the
organized money market. If the banks do not perform this function, savings
either remains idle or used in creating assets, which are low in scale of plan
priorities.

2. Creation of Credit:-Banks create credit for the purpose of providing

more funds for development projects. Credit creation leads to increased
production, employment, sales and prices and thereby they cause faster
economic development.

3. Channelizing the Funds to Productive Investment:-Banks invest the

savings mobilized by them for productive purposes. Capital formation is not
the only function of commercial banks. Pooled savings should be
distributed to various sectors of the economy with a view to increase the
productivity of the nation. Then only it can be said to have performed an
important role in the economic development of the nation.

Commercial Banks aid the economic development of the nation through the
capital formed by them. In India, loan lending operation of commercial
banks subject to the control of the RBI. So our banks cannot lend loan, as
they like.

4. Fuller Utilization of Resources:-Savings pooled by banks are utilized to

a greater extent for development purposes of various regions in the
country. It ensures fuller utilization of resources.

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5. Encouraging Right Type of Industries:-The banks help in the
development of the right type of industries by extending loan to right type
of persons. In this way, they help not only for industrialization of the
country but also for the economic development of the country. They grant
loans and advances to manufacturers whose products are in great demand.
The manufacturers in turn increase their products by introducing new
methods of production and assist in raising the national income of the
country.

6. Bank Rate Policy:-Economists are of the view that by changing the bank
rates, changes can be made in the money supply of a country. In our
country, the RBI regulates the rate of interest to be paid by banks for the
deposits accepted by them and also the rate of interest to be charged by
them on the loans granted by them.

7. Bank Monetize Debt:-Commercial banks transform the loan to be repaid

after a certain period into cash, which can be immediately used for business
activities. Manufacturers and wholesale traders cannot increase their sales
without selling goods on credit basis. But credit sales may lead to locking up
of capital. As a result, production may also be reduced. As banks are lending
money by discounting bills of exchange, business concerns are able to
carryout the economic activities without any interruption.

8. Finance to Government:-Government is acting as the promoter of

industries in underdeveloped countries for which finance is needed for it.
Banks provide long-term credit to Government by investing their funds in
Government securities and short-term finance by purchasing Treasury Bills.

9. Bankers as Employers:-After the nationalization of big banks, banking

industry has grown to a great extent. Bank’s branches are opened in almost
all the villages, which leads to the creation of new employment
opportunities. Banks are also improving people for occupying various posts
in their office.

10. Banks are Entrepreneurs:-In recent days, banks have assumed the
role of developing entrepreneurship particularly in developing countries
like India. Developing of entrepreneurship is a complex process. It includes
the formation of project ideas, identification of specific projects suitable to
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local conditions, inducing new entrepreneurs to take up these well-
formulated projects and provision of counseling services like technical and
managerial guidance.

 Advantages of Banking System

1. Economies of Large Scale Operations:-Under the branch banking

system, the bank with a number of branches possesses huge financial
resources and enjoys the benefits of large-scale operations,

(a) Highly trained and experienced staff is appointed which increases the
efficiency of management,

(b) Division of labour is introduced in the banking operations which

ensures greater economy in the working of the bank. Right persons are
appointed at the right place and specialisation increases,

(c) Funds are made available liberally and at cheaper rates,

(d) Foreign exchange business is done economically,

(e) Large financial resources and wider geographical coverage increases

public confidence in the banking system.

2. Spreading of Risk:-Another advantage of the branch banking system is

the lesser risk and greater capacity to meet risks,

(a) Since there is geographical spreading and diversification of risks, the

possibility of the failure of the of the bank is remote,

(b) The losses incurred by some branches may be offset by the profits
earned by other branches,

(c) Large resources of branch banks increase their ability to face any crisis.

3. Economy in Cash Reserves:-Under the branch banking system, a

particular branch can operate without keeping large amounts of idle
reserves. In time of the need, resources can be transferred from one branch
to another.

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4. Diversification on Deposits and Assets:-There is greater diversification
of both deposits and assets under branch banking system because of wider
geographical coverage,

(a) Deposits are received from the areas where savings are in plenty,

(b) Loans are extended in those areas where funds are scarce and interest
rates are high. The choice of securities and investments is larger in this
system which increases the. safety and liquidity of funds.

5. Cheap Remittance Facilities:-Since bank branches are spread over the

whole country, it is easier and cheaper to transfer funds from one place to
another. Inter-branch indebtedness is more easily adjusted than inter-bank
indebtedness.

6. Uniform Interest Rates:-Under branch banking system, mobility of

capital increases, which in turn, brings about equality in interest rates.
Funds are transferred from areas with excessive demand for money to
areas with deficit demand for money. As a result, the uniform rate of
interest prevails in the whole area; it is prevented from rising in the
excessive demand area and from falling in the deficit demand area.

7. Proper Use of Capital:-There is proper use of capital under the branch

banking system. If a branch has excess reserves, but no opportunities for
investment, it can transfer the resources to other branches which can make
most profitable use of these resources.

8. Better Facilities to Customers:-The customers get better and greater

facilities under the branch banking system. It is because of the small
number of customers per branch and the increased efficiency achieved
through large scale operations.

9. Banking Facilities in Backward Areas:-Under the branch banking

system, the banking facilities are not restricted to big cities. They can be
extended to small towns and rural as well as underdeveloped areas,. Thus,
this system helps in the development of backward regions of the country.

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10. Effective Control:- Under the branch banking system, The Central bank
than have a more efficient control over the banks because it has to deal only
with few big banks and nor with each individual branch. This ensures better
implementation of monetary policy.

 Disadvantages and limitations of banking system

1. Problem of Management:-Under the branch banking system a number

of difficulties as regards management, supervision and control arise:

(a) since the management of the bank gets concentrated at the head office,
the managers can afford to be lax and indulgent in their duties and are often
involved in serious irregularities while using the funds.

(b) Since the branch manager has to seek permission from the head office
on each and every matter, this results in unnecessary delay and red- tapism
in the banking business.

2. Lack of Initiative:- Branch managers generally lack initiative on all-

important matters; they cannot take independent decisions and have to
wait for. The clearance signal from the head office.

3. Monopolistic Tendencies:-Branch banking encourages monopolistic

tendencies in the banking system. A few big banks dominate and control the
whole banking system of the country through their branches. This can lead
to the concentration of resources into a few hands.

4. Regional Imbalances:-Under branch banking system, the financial

resources collected in the smaller and backward regions are transferred to
the bigger industrial centres. This encourages regional imbalances in the
country.

5. Adverse Linkage Effect:-Under branch banking system, the losses and

weaknesses of some branches also have their effect on other branches of
the bank.

6. Inefficient Branches:-In this system, the weak and unprofitable

branches continue to operate under the protection cover of the large and
more profitable branches.
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7. Other Defects:-Other defects of branch banking system arc as follows:

(a) Preferential treatment is given to the branches near the head office,

(b) Higher interest rates are charged in the developed area to compensate
for the lower rates charged in the backward areas,

(c) There is concentration and unhealthy competition among the branches

of different banks in big cities,

(d) Many difficulties are faced when a bank opens branches. In foreign
countries.

 Relationship Between Banker And Customer

Basically, the relationship between banker and customer is contractual in

nature. Since bank offers the variety of services to the customer, the
relationship between the bank and the customer vary according to the type
of service rendered by the bank.

1. Relationship of Debtor and Creditor:- Banker accepts deposits of

money from his customers for the purpose of lending and investment
and repays it on demand as per the terms of the contract of deposit. In
fact, deposit accepted by the bank is technically money loaned out to the
bank from the depositors. Therefore, the general relationship between a
depositor and the banker is a relation of the debtor and the creditor. The
depositors are creditors and the bank is the debtor. However, the
relationship between the banker and customer is directly opposite when
the bank lends money to its customer. The bank becomes the creditor
and the customer becomes the debtor.
2. Relationship of Trustee and Beneficiary:- When a banker accepts
items like securities or documents for safe custody or maintains escrow
accounts of the customers, the relation between the banker and
customer is a Trustee and the Beneficiary (Trustier). The bank is the
Trustee and the customer is the beneficiary.

(Escrow is a separate type of bank account generally opened for various

business deals like acquisition, transfer of shares and debentures of a
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company, where money deposited in banks will be released only under
fulfillment of certain conditions of a contract).

3. Relationship of Lessor and Lessee:- Similarly, when a customer hires a

safe deposit locker from the bank, the relation between the bank and the
customer is lessor and lessee. The bank is the lessor (licensor) and the
hirer of safe deposit locker is the lessee (licensee/tenant).

4. Relationship of Principal and Agent:- When a bank collects cheques,

bills and other instruments for customers, the relation between the bank
and customer is that of Principal and Agent. The bank also makes regular
payments of insurance premium rent etc. as per standing instruction
received from the customer. In the above cases also the relation between
the bank and the customer is of Principal and agent. The bank act as the
agent and customer the principal.
5. Relationship of Assigner and Assignee:- An assignor is a person who
transfers his security rights to a lender as collateral to the money
borrowed by him. The transfer of Life Insurance Policies, National
Saving Certificates, Supply bills etc. in the name of the bank is examples
of assignment. The bank on whose name security rights are transferred
by the assignor is called as assignee. On full payment of dues to the
assignee, the assignor can get the security re-assigned in his name.

6. Relationship of Bailor and Bailee:- Bailment refers to delivery of

goods by one person to another for some purpose under a condition that
the goods to be returned to depositor when the purpose is accomplished
or otherwise disposed of according to the directions of the person while
delivering the goods (Sec 148 of contract act). The person delivering the
goods is known as bailor and the person to whom goods are delivered is
called bailee

Some examples of bailment are;

1. A car parked in a parking area where parking charge is collected. The car
owner is the bailor and the contractor who collected the charge is the

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bailee. As a bailee, the contractor has to take care of the car parked at his
parking area.
2. The articles, valuables, securities deposited in the safe deposit vault of
the bank are also an example of bailment. In this case, the customer and
banker relationship is bailor and bailee, besides their relationship as
trustee and beneficiary. The bailor is still the rightful owner of the item
though the item is in bailee’s possession. As a bailee, the bank has to take
care of the goods bailed.
3. Relationship of Pledger and pledgee is also a type of bailment in which
goods are delivered by one person to another as a security for payment
of a debt or performance of a promise (Sec 172, Contract Act, 1872). For
example, the borrower delivers the gold jewel to the bank as a security
for the loan granted by the bank. In this case, the borrower who pledged
the gold to the bank is the bailor (pledger) and the bank is the bailee
(pledgee).

 BUSINESS OF BANKING COMPANIES

Forms of business in which banking companies may engage

(1) In addition to the business of banking, a banking company may

engage in any one or more of the following forms of business,
namely:-
a) the borrowing, raising, or taking up of money; the lending or advancing
of money either upon or without security; the drawing, making,
accepting, discounting, buying, selling, collecting and dealing in bills of
exchange, hundies, promissory notes, coupons, drafts, bills of lading,
railway receipts, warrants, debentures, certificates, scrips and other
instruments and securities whether transferable or negotiable or not;
the granting and issuing of letters of credit, traveller's cheques and
circular notes; the buying, selling and dealing in bullion and specie; the
buying and selling of foreign exchange including foreign bank notes;
the acquiring, holding, issuing on commission, underwriting and
dealing in stock, funds, shares, debentures, debenture stock, bonds,

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obligations, securities and investments of all kinds; the purchasing and
selling of bonds, scrips or other forms of securities on behalf of
constituents or others, the negotiating of loans and advances; the
receiving of all kinds of bonds, scrips or valuables on deposit or for safe
custody or otherwise; the providing of safe deposit vaults; the
collecting and transmitting of money and securities;
b) acting as agents for any Government or local authority or any other
person or persons; the carrying on of agency business of any
description including the clearing and forwarding of goods, giving of
receipts and discharges and otherwise acting as an attorney on behalf
of customers, but excluding the business of a 1 [Managing Agent or
Secretary and Treasurer] of a company;
c) contracting for public and private loans and negotiating and issuing the
same;
d) the effecting, insuring, guaranteeing, underwriting, participating in
Managing and carrying out of any issue, public or private, of State,
municipal or other loans or of shares, stock, debentures, or debenture
stock of any company, corporation or association and the lending of
money for the purpose of any such issue;
e) carrying on and transacting every kind of guarantee and indemnity
business;
f) Managing, selling and realising any property which may come into the
possession of the company in satisfaction or part satisfaction of any of
its claims;
g) acquiring and holding and generally dealing with any property or any
right, title or interest in any such property which may form the security
or part of the security for any loans or advances or which may be
connected with any such security;
h) undertaking and executing trusts;

i) undertakingtheadministrationofestatesasexecutor,trusteeorotherwise;

j) establishing and supporting or aiding in the establishment and support

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of associations, institutions, funds, trusts and conveniences calculated
to benefit employees or ex-employees of the company or the
dependents or connections of such persons; granting pensions and
allowances and making payments towards insurance; subscribing to or
guaranteeing moneys for charitable or benevolent objects or for any
exhibition or for any public, general or useful object;

k) the acquisition, construction, maintenance and alteration of any

building or works necessary or convenient for the purposes of
thecompany;
l) selling, improving, managing, developing, exchanging, leasing,
mortgaging, disposing of or turning into account or otherwise dealing
withall or any part of the property and rights of thecompany;
m) acquiring and undertaking the whole or any part of the
business of any person or company, when such business is of a nature
enumerated or described in this sub-section;
n) doing all such other things as are incidental or conducive to the
promotion or advancement of the business of thecompany;
o) any other form of business which the Central Government may, by
notification in the Official Gazette, specify as a form of business in
which it is lawful for a banking company toengage.

(2) No banking company shall engage in any form of business

other than those referred to in sub-section(1).

. Use of words "bank", "banker", "banking" or "banking company"

1. No company other than a banking company shall use as with its
business] any of the words "bank", "banker" or "banking" and no company
shall carry on the business of banking in India unless it uses as part of its
name at least one of such words.

2.No firm, individual or group of individuals shall, for the purpose of

carrying on any business, use as part of its or his name any of the words
"bank", "banking" or "banking company".

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3.Nothing in this section shall apply to

(i)a subsidiary of a banking company formed for one or more of the

purposes mentioned in sub-section (1) of section 19, whose name
indicates that it is a subsidiary of that banking company;
(ii)any association of banks formed for the protection of their mutual
interests and registered under section 25 of the Companies
Act, 1956 (1 of1956).]

# Prohibition of trading

Notwithstanding anything contained in section 6 or in any contract, no

banking company shall directly or indirectly deal in the buying or selling
or bartering of goods, except in connection with the realisation of security
given to or held by it, or engage in any trade, or buy, sell or barter goods
for others otherwise than in connection with bills of exchange received for
collection or negotiation or with such of its business as is referred to in
clause (i) of sub-section (1) of section 6:

1 [PROVIDED that this section shall not apply to any such business as is
specified in pursuance of clause (o) of sub-section (1) of section 6.]

this section, "goods" means every kind of movable property, other than
actionable claims, stocks, shares, money, bullion and specie, and all
instruments referred to in clause (a) of sub-section (1) of section 6.

# Disposal of non-banking assets

Notwithstanding anything contained in section 6, no banking company

shall hold any immovable property howsoever acquired, except such as is
required for its own use, for any period exceeding seven years from the
acquisition thereof or from the commencement of this Act, whichever is
later or any extension of such period as in this section provided, and such
properly shall be disposed of within such period or extended period, as
the case maybe:

PROVIDED that the banking company may, within the period of seven
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years as aforesaid deal or trade in any such property for the purpose of
facilitating the disposal thereof:

PROVIDED FURTHER that the Reserve Bank may in any particular case
extend the aforesaid period of seven years by such period not exceeding
five years where it is satisfied that such extension would be in the
interests of the depositors of the banking company.

10. Prohibition of employment of Managing Agents and

restrictions on certain forms of employment
(1) No banking company-

(a) shall employ or be managed by a Managing agent; or

(b)shall employ or continue the employment of any person-

who is, or at any time has been, adjudicated insolvent, or has suspended
payment or has compounded with his creditors, or who is, or has been,
convicted by a criminal court of an offence involving moral turpitude; or

(i) (ii) whose remuner remuneration or part of whose

remuneration takes the form of commission or of a share in
the profits of the company:

2[PROVIDED that nothing contained in this sub-clause shall apply to the

payment by a banking company of-

(a) any bonus in pursuance of a settlement or award

arrived at or made under any law relating to
industrial disputes or in accord- ance with any
scheme framed by such banking company or in
accordance with the usual practice prevailing in
banking business;

(b) any commission to any broker(including

guarantee broker), cashier-contractor, clearing and

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forwarding agent, auctioneer or any other person,
employed by the banking company under a contract
otherwise than as a regular member of the staff of the
company; or]

(ii) whose remuneration is, in the opinion of the Reserve

Bank, excessive; or

(c) shall be managed by any person-

3[(i) who is a Director of any other company not being-

(a) a subsidiary of the banking company, or

(b) a company registered under section25of the
Companies Act, 1956 (1 of1956):

PROVIDED that the prohibition in this sub-clause shall not apply in

respect of any such Director for a temporary period not exceeding three
months or such further period not exceeding nine months as the Reserve
Bank may allow; or]

(ii) vocation; or

(iii) 1[whose term of office as a person Managing the

company is]for period exceeding five years at any onetime:

2 [PROVIDED that the term of office of any such person may be renewed
or extended by further periods not exceeding five years on each occasion
subject to the condition that such renewal/extension shall not be
sanctioned earlier than two years from the date on which it is to come into
force:

PROVIDED ALSO that where the term of office of such person is for an
indefinite period, such term, unless it otherwise comes to an end earlier,
shall come to an end immediately on the expiry of five years from the date
of his appointment or on the expiry of three months from the date of
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commencement of section 8 of the Banking Laws (Miscellaneous
Provisions) Act, 1963(55 of 1963), whichever is later:]

PROVIDED FURTHER that nothing in this clause shall apply to a Director,

other than the Managing Director, of a banking company by reason only of
his being such Director.

Explanation.--For the purpose of sub-clause (iii) of clause (b), the

expression "remuneration", in relation to person employed or continued
in employment, shall include salary, fees and perquisites but shall not
include any allowances or other amounts paid to him for the purpose of
expense actually incurred by him in the performance of his duties.
(2) In forming its opinion under sub-clause (iii) of clause (b) of
sub-section (1), the Reserve Bank may have regard among other
matters to thefollowing:-

(i) the financial condition and history of the banking company,

its size and area of operation, its resources, the volume of its
business, and the trend of its earning capacity;

(ii) the number of its branches or offices;

(iii) the qualifications, age and experience of the person

concerned;

(iv) the remuneration paid to other persons employed by the

banking company or to any person occupying a similar position
in any other banking company similarly situated; and

(v) the interests of its depositors.

1[***].

(6) Any decision or order of the Reserve Bank made under this section
shall be final for all purposes.]

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2[10A. Board of Directors to include persons with professional or
other experience

(1) Notwithstanding anything contained in any other law for the

time being in force, every banking company,-

(a) in existence on the commencement of section 3 of the

Banking Laws (Amendment)Act, 1968 (58 of 1968),or
shall comply with the requirements of this section:

PROVIDED that nothing contained in this sub-section shall apply to a

banking company referred to in clause (a) for a period of three months
from such commencement.
Not less than fifty-one per cent, of the total number of
(2)
members of the Board of Directors of a banking company shall
consist of persons, who-

(a) shall have special knowledge or practical experience in

respect of one or more of the following matters, namely:-

(i) accountancy,
(ii) agriculture and rural economy,
(iii) banking,
(iv) co-operation,
(v) economics,
(vi) finance,
(vii) law,
(viii) small-scale industry,
(ix) any other matter the special knowledge of, and practical
experience in, which would, in the opinion of the Reserve
Bank, be useful to the banking company:

PROVIDED that out of the aforesaid number of Directors, not less than two
shall be persons having special knowledge or practical experience in
respect of agriculture and rural economy, co-operation or small- scale
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industry; and

(b) shall not-

(1) have substantial interest in, or be connected with,

whether as employee, manager or Managing agent,-

(i) registered under section 25 of the Companies Act,

1956 (1 of 1956),or

(ii) any firm,

which carries on any trade, commerce or industry and

which, in either case, is not a small-scale industrial
concern, or

(2) be proprietors of any trading, commercial or industrial

concern, not being a small-scale industrial concern.
[(2A) Not with standing anything to the contrary contained
in the Companies Act, 1956 (1 of 1956), or in any other law
for the time being in force,-

(i) no Director of a banking company, other than its

Chairman or whole-time Director, by whatever name
called, shall hold office continuously for a period
exceeding eight years;

(ii) a Chairman or other whole-time Director of a banking

company who has been removed from office as such
Chairman, or whole-time Director, as the case may be,
under the provisions of this Act shall also cease to be a
Director of the banking company and shall also not be
eligible to be appointed as a Director of such banking
company, whether by election or co-option or otherwise,
for a period of four years from the date of his ceasing to
be the -Chairman or whole-time Director as the case
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maybe.

(3) If, in respect of any banking company the requirements,

as laid down in subsection (2), are not fulfilled at any time,
the Board of Directors of such Board so as to ensure that the
said requirements are fulfilled.

(4) If, for the purpose of re-constituting the Board under

sub-section (3), it is necessary to retire any Director or

Directors, the Board may, by lots drawn in such manner as

may be prescribed, decide which Director or Directors shall
cease to hold office and such decision shall be binding on
every Director of the Board.
Where the Reserve Bank is of opinion that the composition of the Board of
Directors of a banking company is such that it does not fulfil the
requirements of subsection (2), it may, after giving to such banking
company a reasonable opportunity of being heard, by an order in writing,
direct the banking company to so re-constitute its Board of Directors as to
ensure that the said requirements are fulfilled and, if within two months
from the date of receipt of that order, the banking company does not
comply with the directions made by the Reserve Bank, that Bank may,
after determining, by lots drawn in such manner as may be prescribed, the
person who ought to be removed from the membership of the Board of
Directors, remove such person from the office of the Director of banking
company and with a view to complying with the provision of sub-section
(2) appoint a suitable person as a member of the Board of
Directors in the place of the person so removed whereupon
the person so appointed shall be deemed to have been duly
elected by the banking company as its Director.

(6) Every appointment, removal or reconstitution duly

made, and every election duly held, under this section shall
be final and shall not be called into question in any court.

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(7) Every Director elected or, as the case may be, appointed
under this section shall hold office until the date up to which
his predecessor would have held office, if the election had
not been held, or, as the case may be, the appointment had
not been made.

(8) No act or proceeding of the Board of Directors of a

banking company shall be invalid by reason only of any
defect in the composition thereof or on the ground that it is
subsequently discovered that any of its members did not
fulfil the requirements of this section.

10B. Banking company to be managed by who

time Chairman

1 [(1) Notwithstanding anything contained in any law for the time

being in force or in any contract to the contrary, every banking
company in existence on the commencement of the Banking
Regulation (Amendment) Act,1994 (20 of 1944),or which comes
into existence thereafter shall have one of its Directors, who may
be appointed on a whole-time or a part-time basis, as Chairman of
its board of Directors, and where he is appointed on a whole-time
basis, as Chairman of its board of Directors, he shall be entrusted
with the management of the whole of the affairs of the banking
company:

PROVIDED that the Chairman shall exercise his powers subject to the
superintendence, control and direction of the board of Directors.

(1A) Where a Chairman is appointed on a part-

time basis,-
(i) such appointment shall be with the previous approval of the
Reserve Bank and be subject to such conditions as the Reserve
Bank may specify while giving such approval;

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(ii) the management of the whole of the affairs of such banking
company shall be entrusted to a Managing Director who shall
exercise his powers subject to the superintendence, control
and direction of the board of Directors.]

(2) 1 [Every Chairman of the board of Directors who is appointed

on a whole-time basis and every Managing Director] of a banking
company shall be in the whole- time employment of such
company and shall hold office for such period, not exceeding five
years, as the board of Directors may fix, but shall, subject to the
provisions of this section, be eligible for re-election of
reappointment:

PROVIDED that nothing in this sub-section shall be construed as

prohibiting a Chairman from being a Director of a subsidiary of the
banking company or a Director of a company registered under section
25 of the Companies Act, 1956 (1 of1956).

(3) Every person holding office on the commencement of section 3

of the Banking Laws (Amendment) Act, 1968 (58of 1968), as
Managing Director of a banking company shall-

(a) if there is a Chairman of its board of Directors, vacate office

on such commencement, or

(b) if there is no Chairman of its board of Directors, vacate

office on the date on which the Chairman of its board of
Directors is elected or appointed in accordance with the
provisions of this section.

(4) 2 [Every Chairman who is appointed on a whole-time basis and

every Managing Director of a banking company shall be person
who has special knowledge and practical experience of-

(a) the working of a banking company, or of the State Bank of

India or any subsidiary bank or a financial institution, or
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(b) financial, economic or business administration:
PROVIDED that a person shall be disqualified for being a 1 [Chairman
who is appointed on a whole time basis or a Managing Director], if be-

(a) is a Director of any company other than a company

referred to in the proviso to sub-section (2),or

(b) is a partner of any firm which carries on any trade,

business or industry, or

(c) has substantial interest in any other company or firm,

or

(d) is a Director, manager, Managing agent, partner or

proprietor of any trading, commercial or industrial
concern, or

(e) is engaged in any other business or vocation.

(5) 2 [A Chairman of the board of Directors appointed on a whole-

time basis or a Managing Director] of a banking company may, by
writing, under his hand addressed to the company, resign his
office, 3[* **].

4 [(5A) 5 [A Chairman of the board of Directors appointed on a

whole-time basis or a Managing Director] whose term of office has
come to an end, either by reason of his resignation of his office,
shall, subject to the approval of the Reserve Bank, continue in
office until his successor assumes office.
Without prejudice to the provisions of section 36AA where the
Reserve Bank is of opinion that any person who, is, or has been
elected to be, the 6 [Chairman of the board of Directors who is
appointed on a whole-time basis or the Managing Director]of a
banking company is not a fit and proper person to hold such
office, it may, after giving to such person and to the banking
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company a reasonable opportunity of being heard by order in
writing, require the banking company to elect or appoint any
other person as the 7[Chairman of the board of Directors who is
appointed on a whole-time basis or the Managing Director]and if,
within a period of two months from the date of receipt of such
order, the banking company fails to elect or appoint a suitable
person as the 1 [Chairman of the board of Directors who is
appointed on a whole-time basis or the Managing Director], the
Reserve Bank may, by order, remove the first-mentioned person
from the office of the 2 [Chairman of the board of Directors who is
appointed on a whole-time basis or the Managing Director]of the
banking company and appoint a suitable person in his place
whereupon the person so appointed shall be deemed to have
been duly elected or appointed, as the case may be, as the 3
[Chairman of the board of Directors who is appointed on a whole-
time basis or the Managing Director] of such banking company
and any person elected or 4 [appointed as Chairman on a whole-
time basis or Managing Director] under this sub-section shall hold
office for the residue of the period of office of the person in whose
place he has been so elected or appointed.

(6) The banking company and any person against whom an order
of removal is made under sub-section (6) may, within thirty days
from the date of communication to it or to him of the order, prefer
an appeal to the Central Government and the decision of the
Central Government thereon, and subject thereto, the order made
by the Reserve Bank under sub-section (6), shall be final and shall
not be called into question in any court.

(7) Notwithstanding anything contained in this section, the

Reserve Bank may, if in its opinion it is necessary in the public
interest so to do, permit 5 [the Chairman of the board of Directors
who is appointed on a whole-time basis or the Managing Director]
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to undertake such part-time honorary work as is not likely to
interfere with his duties as 6[such Chairman or Managing
Director].

(8) Notwithstanding anything contained in this section, where a

person 6[appointed on a whole-time basis, as Chairman of the
board of Directors or the Managing Director]dies or resigns or is
by infirmity or otherwise rendered incapable of carrying out his
duties or is absent on leave or otherwise in circumstances not
involving the vacation of his office, the banking company may,
with the approval of the Reserve Bank, make suitable
arrangements for
carrying out the 1 [duties of Chairman or Managing Director]
for a total period not exceeding four months.]

2[10BB. Power of Reserve Bank to appoint 3[Chairman of the Board

of Directors appointed on a whole-time basis or a Managing
Director] of a banking company

(1) Where the office, of the 4 [Chairman of the board of Directors

appointed on a whole-time basis or a Managing Director] of a
banking company is vacant, the Reserve Bank may, if it is of
opinion that the continuation of such vacancy is likely to adversely
affect the interests of the banking company, appoint a person
eligible under sub-section (4) of section 10B to be so
appointed, to be the 5 [Chairman of the board of Directors
appointed on a whole-time basis or a Managing Director]of the
banking company and where the person so appointed is not a
Director of such banking company, he shall, so long as he holds the
office of the 6 [Chairman of the board of Directors appointed on a
whole-time basis or a Managing Director], be deemed to be
Director of the banking company.

(2) The 7 [Chairman of the board of Directors appointed on a

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whole-lime basis or a Managing Director] so appointed by the
Reserve Bank shall be in the whole- time employment of the
banking company and shall hold office for such period not
exceeding three years, as the Reserve Bank may specify, but shall,
subject to other provisions of this Act, be eligible for
reappointment.

(3) The 8 [Chairman of the board of Directors appointed on a

whole-time basis or a Managing Director] so appointed by the
Reserve Bank shall draw from the banking company such pay and
allowances as the Reserve Bank may determine and may be
removed from office only by the Reserve Bank.
Save as otherwise provided in this section, the provisions of
section 10B shall, as far as may be, apply to the 9[Chairman of the
board of Directors appointed on a whole-time basis or a Managing
Director] appointed by the Reserve Bank under subsection (1) as
they apply to a 1 [Chairman of the board of Directors appointed
on a whole-time basis or a Managing Director] appointed by the
banking company.]

2[10C. Chairman and certain Directors not to be required to hold

qualification shares

3 [Chairman of the board of Directors who is appointed on a

whole-lime basis or a Managing Director] of a banking company
(by whomsoever appointed) and a Director of a banking company
(appointed by the Reserve Bank under section 10A) shall not be
required to hold qualification shares in the banking company.]

10D. Provisions of sections 10A and 10B to override all other laws,
contracts, etc

Any appointment or removal of a 4 [Director, Chairman of the

board of Directors who is appointed on a whole-time basis or a
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Managing Director] in pursuance of section IOA or section 10B 5
[or section 10BB] shall have effect and any such person shall not
be entitled to claim any compensation for the loss or termination
of office, notwithstanding anything contained in any law or in any
contract, memorandum or articles of association.]

11. Requirement as to minimum paid-up capital and reserves

(1) Notwithstanding anything contained in 6[section 149 of the

Companies Act, 1956 (1 of 1956)], no banking company in
existence on the commencement of this Act, shall, after the expiry of
three years from such commencement or of such further period
not exceeding one year as the Reserve Bank, having regard to the
interests of the depositors of the company, may think fit in any
particular case to allow, carry on business 7[in India], and no other
banking company shall after the commencement of this Act,
commence or carry on business 8[in
India] 1 [unless it complies with such of the requirements of this
section as are applicable to it].

2[(2) In the case of a banking company incorporated outside India-

(a) the aggregate value of its paid-up capital and reserves shall
not be less than fifteen lakhs of rupees and if it has a place or
places of business in the city of Bombay or Calcutta or both,
twenty lakhs of rupees; and

(b) 3 [the banking company shall deposit and keep deposited

with the Reserve Bank either in cash or in the form of
unencumbered approved securities, or partly in cash and
partly in the form of such securities-

(i) an amount which shall not be less than the minimum

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required by clause (a);and

(ii) as soon as may be after the expiration of each 4 [* * *]

year, an amount calculated at twenty percent of its profit for
that year in respect of all business transacted through its
branches in India, as disclosed in the profit and loss account
prepared with reference to that year under section29:]

PROVIDED that any such banking company may at any

time replace-

(i) any securities so deposited by cash or by any

other unencumbered approved securities or partly by
cash and partly by other such securities, so however,
that the total amount deposited is not affected;

(ii) any cash so deposited by unencumbered approved

securities of an equal value.]
5 [(2A) Notwithstanding anything contained in sub-section(2), the
Central Government may, on the recommendation of the Reserve
Bank, and having regard to the adequacy of the amounts already
deposited and kept deposited by a banking company under sub-
section(2),in relation to its deposit liabilities in India, declare by
order in writing that the provisions of sub-clause (ii) of clause
(b) of sub-section (2) shall not apply to such banking company for
such period as may be specified in the order.]

(3) In the case of any banking company to which the provisions of

sub-section (2) do not apply, the aggregate value of its paid-up
capital and reserves shall not be less than-

(i) if it has places of business in more than one State, five lakhs
of rupees, and if any such place or places of business is or are
situated in the city of Bombay or Calcutta or both, ten lakhs of
rupees;

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(ii) if it has all its places of business in one State none of which
is situated in the city of Bombay or Calcutta, one lakh of rupees
in respect of its principal place of business, plus ten thousand
rupees in respect of each of its other places of business situated
in the same district in which it has its principal place of
business, plus twenty-five thousand rupees in respect of each
place of business situated elsewhere in the State otherwise
than in the same district:

PROVIDED that no banking company to which this clause applies shall be

required to have paid-up capital and reserves exceeding an aggregate
value of five lakhs of rupees:

PROVIDED FURTHER that no banking company to which this clause

applies and which has only one place of business, shall be required to have
paid-up capital and reserves exceeding an aggregate value of fifty
thousand rupees:

1 [PROVIDED FURTHER that in the case of every clause

applies and which commences banking business for the first
time after the commencement of the Banking Companies
(Amendment) Act, 1962 (36of 1962), the value of its paid-
up capital shall not be less than five lakhs of rupees;]
if it has all its places of business in one State, one or more of
which is or are situated in the city of Bombay or Calcutta,
five lakhs of rupees, plus twenty-five thousand rupees in
respect of each place of business situated outside the city of
Bombay or Calcutta, as the case maybe: PROVIDED that no
banking company to which this clause applies shall be
required to have paid-up capital and reserves exceeding an
aggregate value of ten lakhs of rupees.

Explanation.--For the purposes of this sub-section, a place of business

situated 1 [in a State] other than that in which the principal place of

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business of the banking company is situated shall, if it is not more than
twenty-five miles distant from such principal place of business, be deemed
to be situated within the same State as such principal place of business.

(4) Any a mount deposited and kept deposited with the Reserve
Bank under2[**
*] sub-section (2) by any banking company incorporated 3
[outside India] shall, in the event of the company ceasing for any
reason to carry on banking business 4 [in India], be an asset of
the company on which the claims of all the creditors of the
company 5[in India] shall be a first charge.

6[(5) For the purposes of this section,-

(a) "place of business" means any office, sub-office, sub-pay

office and any place of business at which deposits are received,
cheques cashed, or moneys lent;

(b) "value" means the real or exchangeable value, and not the
nominal value which may be shown in the books of the banking
company concerned.]

(6) If any dispute arises in computing the aggregate value of the

paid-up capital and reserves of any banking company, a
determination thereof by the Reserve Bank shall be final for the
purposes of this section.

7[12. Regulation of paid-up capital, subscribed capital and

authorised capital and voting rights of shareholders.--
(1) No banking company shall carry on business in India, unless it
satisfies the following conditions, namely:-
(i) that the subscribed capital of the company is not less
than one-half of the authorised capital, and the paid-up
capital is not less than one-half of the subscribed capital and
that, if the capital is increased, it complies with the
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conditions prescribed in this clause within such period not
exceeding two years as the Reserve Bank may allow;
1[(ii) that, notwithstanding anything contained in the
Companies Act, 1956(1 of 1956), the capital of such
banking company consists of--
(a) equity shares only; or

(b) equity shares and preference shares:

PROVIDED that the issue of preference share shall be in accordance with

the guidelines framed by the Reserve Bank specifying the class of
preference shares, the extent of issue of each class of such preference
shares (whether perpetual or irredeemable or redeemable), and the each
class of preference shares may be issued:
PROVIDED further that no holder of the preference share, issued by the
company, shall be entitled to exercise the voting right specified in clause
(b) of sub-section (2) of section 87 of the Companies Act, 1956(1
of1956);]
2[***]

(2) No person holding shares in a banking company shall, in

respect of any shares held by him, exercise voting rights 3 [on
poll] 4 [in excess of 5 (ten per cent)] of the total voting rights of all
the shareholders of the banking company.
6 [PROVIDED that the Reserve Bank may increase, in a
phased manner, such ceiling on voting rights from ten per
cent. to twenty-six per cent.]
(3) Notwithstanding anything contained in any law for the time
being in force or in any contract or instrument no suit or other
proceeding shall be maintained against any person registered as
the holder of a share in a banking company on the ground that the
title to the said share vests in a person other than the registered
holder:
PROVIDED that nothing contained in this sub-section shall bar a suit or
other proceeding-
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(a) by a transferee of the share on the ground that he
has obtained from the registered holder a transfer of
the share in accordance with any law relating to such
transfer; or
(b) on behalf of a minor or a lunatic on the ground
that the registered holder holds the share on behalf of
the minor or lunatic.
(4) Every Chairman, Managing Director or chief executive officer
by whatever name called of a banking company shall furnish to
the Reserve Bank through that banking company returns
containing full particulars of the extent and value of his holding of
shares, whether directly or indirectly, in the banking company
and of any change in the extent of such holding or any variation in
the rights attaching thereto and such other information relating to
those shares as the Reserve Bank may, by order, require and in
such form and at such time as maybe specified in the order.]

1[12A. Election of new Directors

(1) The Reserve Bank may, by order, require any banking

company to call a general meeting of the shareholders of the
company within such time, not less than two months from the
date of the order, as may be specified in the order or within such
further time as the Reserve Bank may allow in this behalf, to elect
in accordance with the voting rights permissible under this Act
fresh Directors, and the banking company shall be bound to
comply with the order.

(2) Every Director elected under sub-section (1) shall hold office
until the date up to which his predecessor would have held office, if
the election had not been held.

(3) Any election duly held under this section shall not be called in
question in any court.]

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1 [12B. Regulation of acquisition of shares or voting rights
(1) No person (hereinafter referred to as "the applicant") shall,
except with the previous approval of the Reserve Bank, on an
application being made, acquire or agree to acquire, directly or
indirectly, by himself or acting in concert with any other person,
shares of a banking company or voting rights therein, which
acquisition taken together with shares and voting rights, if any,
held by him or his relative or associate enterprise or person acting
in concert with him, makes the applicant to hold five per cent. or
more of the paid-up share capital of such banking company or
entitles him to exercise five per cent. or more of the voting rights
in such banking company.
Explanation 1.--For the purposes of this sub-section,--
(a) "associate enterprise" means a company, whether
incorporated or not, which,--
(i) is a holding company or a subsidiary
company of the applicant; or
(ii) is a joint venture of the applicant; or

(iii) controls the composition of the Board of

Directors or other body governing the
applicant; or
(iv) exercises, in the opinion of the Reserve
Bank, significant influence on the applicant in
taking financial or policy decisions; or
(v) is able to obtain economic benefits from the
activities of the applicant;
(b) "relative" shall have the meaning assigned to it in
section 6 of the Companies Act, 1956(1 of1956);
(c) persons shall be deemed to be "acting in concert"
who, for a common objective or purpose of
acquisition of shares or voting rights in excess of the
percentage mentioned in this sub-section, pursuant to

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an agreement or understanding (formal or informal),
directly or indirectly cooperate by acquiring or
agreeing to acquire shares or voting rights in the
banking company.
Explanation 2.--For the purposes of this Act, joint venture means a legal
entity in the nature of a partnership engaged in the joint undertaking of a
particular transaction for mutual profit or an association of persons or
companies jointly undertaking some commercial enterprise wherein all
contribute assets and share risks.
(2) An approval under sub-section (1) may be granted by the
Reserve Bank if it is satisfied that--
(a) in the public interest; or

(b) in the interest of banking policy; or

(c) to prevent the affairs of any banking company being

conducted in a manner detrimental or prejudicial to the
interests of the banking company; or
(d) in view of the emerging trends in banking and
international best practices; or
(e) in the interest of the banking and financial system in
India, the applicant is a fit and proper person to acquire
shares or voting rights:
PROVIDED that the Reserve Bank may call for such information from the
applicant as it may deem necessary for considering the application
referred to in sub-section (1):
PROVIDED FURTHER that the Reserve Bank may specify different criteria
for acquisition of shares or voting rights in different percentages.
(3) Where the acquisition is by way of transfer of shares of a
banking company and the Reserve Bank is satisfied that such
transfer should not be permitted, it may, by order, direct that no
such share shall be transferred to the proposed transferee and
may further direct the banking company not to give effect to the
transfer of shares and in case the transfer has been registered, the
transferee shall not be entitled to exercise voting rights on poll in
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any of the meetings of the banking company.
(4) The approval for acquisition of shares may be subject to such
conditions as the Reserve Bank may deem fit to impose, including
a condition that any further acquisition of shares shall require
prior approval of the Reserve Bank and that the applicant
continues to be a fit and proper person to hold the shares or
voting rights.
Before issuing or allotting any share to any person or registering
the transfer of shares in the name of any person, the banking
company shall ensure that the requirements of sub-section (1) are
complied with by that person and where the acquisition is with
the approval of the Reserve Bank, the banking company shall
further ensure that the conditions imposed under sub-section (4),
if any, of such approval are fulfilled.
(5) The decision of the Reserve Bank on the application made under
sub-section
(1) shall be taken within a period of ninety days from the date of
receipt of the application by the Reserve Bank:
PROVIDED that in computing the period of ninety days, the period taken
by the applicant for furnishing the information called for by the Reserve
Bank shall be excluded.
(7) The Reserve Bank may specify the minimum percentage of
shares to be acquired in a banking company if it considers that the
purpose for which the shares are proposed to be acquired by the
applicant warrants such minimum shareholding.
(8) The Reserve Bank may, if it is satisfied that any person or
persons acting in concert with him holding shares or voting rights
in excess of five per cent. of the total voting rights of all the
shareholders of the banking company, are not fit and proper to
hold such shares or voting rights, pass an order directing that
such person or persons acting in concert with him shall not, in the
aggregate, exercise voting rights on poll in excess of five per cent.
of the total voting rights of all the shareholders of the banking
company:

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PROVIDED that the Reserve Bank shall not pass any such order without
giving an opportunity of being heard to such person or persons acting in
concert with him.]
13. Restriction on commission, brokerage, discount, etc. on sale of
shares
Notwithstanding anything to the contrary contained in 1 [sections
76 and 79 of the Companies Act, 1956 (1 of 1956)], no banking
company shall pay out directly or indirectly by way of
commission, brokerage, discount or remuneration in any form in
respect of any shares issued by it, any amount exceeding in the
aggregate two and one-half percent of the2[price at which the said
shares are issued.]
3 [Explanation,--For the removal of doubts, it is hereby
declared that the expression "price at which the said shares
are issued" shall include amount or value of premium on
such shares.]
14. Prohibition of charge on unpaid capital
No banking company shall create any charge upon any unpaid
capital of the company, and any such charge shall be invalid.

1[14A. Prohibition of floating charge on assets

(1) Notwithstanding anything contained in section 6, no banking

company shall create a floating charge on the undertaking or any
property of the company or any part thereof, unless the creation
of such floating charge is certified in writing by the Reserve Bank
as not being detrimental to the interests of the depositors of such
company.

(2) Any such charge created without obtaining the certificate of the
Reserve Bank shall be invalid.

(3) Any banking company aggrieved by the refusal of a certificate

under sub- section (1) may, within ninety days from the date on
which such refusal is communicated to it, appeal to the Central
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Government.

(4)The decision of the Central Government where an appeal has been

preferred to it under sub-section (3) or of the Reserve Bank where no
such appeal has been preferred shall be final.]
15. Restrictions as to payment of dividend

2 [ (1)] No banking company shall pay any dividend on its shares

until all its capitalised expenses (including preliminary expenses,
organisation expenses, share-selling commission, brokerage,
amounts of losses incurred and any other item of expenditure not
represented by tangible assets) have been completely written off.

3 [(2)] Not with standing anything to the contrary contained in

sub-section (1) or in the Companies Act, 1956(1 of 1956), a
banking company may pay dividends on its shares without
writing off-

(i) the depreciation, if any, in the value of its investments in

approved securities in any case where such depreciation has
not actually been capitalised or otherwise accounted for as a
loss;
the depreciation, if any, in the value of its investments in
shares, debentures or bonds (other than approved securities)
in any case where adequate provision for such depreciation
has been made to the satisfaction of the auditor of the banking
company;

(ii) the bad debts, if any, in any case where adequate provision
for such debts has been made to the satisfaction of the auditor
of the banking company.]

1[16. Prohibition of common Directors

2[(1) No banking company incorporated in India shall have as a

Director in its Board of Directors any person who is a Director of
any other banking company.

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(1A) No banking company referred to in sub-section (1) shall have
in its Board of Directors, more than three Directors who are
Directors of companies which among themselves are entitled to
exercise voting rights in excess of twenty per cent of the total
voting rights of all the shareholders to that banking company.]

(2) If immediately before the commencement of the Banking

Companies (Amendment) Act, 1956 (95 of 1956),any person
holding office as a director of a banking company is also a Director
of companies which among themselves are entitled to exercise
voting rights in excess of twenty percent of the total voting rights
of all the shareholders of the banking company, he shall, within
such period from such commencement as the Reserve Bank may
specify in this behalf-

(a) either resign his office as a Director of the banking company;

or

(b) choose such number of companies as among themselves are

not entitled to exercise voting rights in excess of twenty per
cent, of the total voting rights of all the shareholders of the
banking company as companies in which he wishes to continue
to hold the office of a Director and resign his office as a
Director in the other companies.]

3 [(3) Nothing in sub-section (1) shall apply to, or in relation to,

any Director appointed by the Reserve Bank.]

4[17. Reserve Fund

(1) Every banking company incorporated in India shall create a

reserve fund and1 [* * *]shall, out of the balance of profit of each
year as disclosed in the profit and loss account prepared under
section 29 and before any dividend is declared, transfer to the

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reserve fund a sum equivalent to not less than twenty per cent of
such profit.

2 [(1A) Notwithstanding anything contained in sub-section (1),

the Central Government may, on the recommendation of the
Reserve Bank and having regard to the adequacy of the paid-up
capital and reserves of a banking company in relation to its
deposit liabilities, declare by order in writing that the provisions
of sub-section (1) shall not apply to the banking company for such
period as may be specified in the order:

PROVIDED that no such order shall be made unless, at the time it is made,
the amount in the reserve fund under sub-section (1), together with the
amount in the share premium account is not less than the paid-up capital
of the banking company.]

(2) Where a banking company appropriates any sum or sums from the
reserve fund or the share premium account, it shall, within twenty-one
days from the date of such appropriation, report the fact to the Reserve
Bank, explaining the circumstances relating to such appropriation:

PROVIDED that the Reserve Bank may, in any particular case, extend the
said period of twenty-one days by such period as it thinks fit or condone
any delay in the making of such report.

3[18. Cash reserve.--

Every banking company, not being a scheduled bank, 4 [shall

maintain in India on a daily basis] by way of cash reserve with
itself or by way of balance in a current account with the Reserve
Bank, or byway of net balance in current accounts or in one or
more of the aforesaid ways, a sum equivalent to 5 [such per cent.]
of the total of its demand and time liabilities in India as on the last
Friday of the second preceding fortnight 1 [as the Reserve Bank
may specify, by notification in the Official Gazette, from time to
time, having regard to the needs of securing the monetary
stability in the country] and shall submit to the Reserve Bank
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before the twentieth day of every month are turn showing the
amount so held on alternate Fridays during a month with
particulars of its demand and time liabilities in India on such
Fridays or if any such Friday is a public holiday under the
Negotiable Instruments Act, 1881(26 of 1881), at the close of
business on the preceding working day.
Explanation.--In this section, and in section 24,-
(a) "liabilities in India" shall not include-

(i) the paid-up capital or the reserves or

any credit balance in the profit and loss
account of the banking company;
(ii) any advance taken from the Reserve
Bank 2 [or from the Development Bank]
or from the Exam Bank 3 [or from the
Reconstruction Bank] 4 [or from the
National Housing Bank] or from the
National Bank
5 [or from the Small Industries Bank] by
the banking company;
(iii) in the case of a Regional Rural Bank,
also any loan taken by such bank from its
Sponsor Bank;
(b) "fortnight" shall mean the period from
Saturday to the second following Friday, both
days inclusive;
(c) "net balance in current accounts" shall, in
relation to a banking company, mean the excess,
if any, of the aggregate of the credit balances in
current account maintained by that banking
company with State Bank of India or a
subsidiary bank or a corresponding new bank
over the aggregate of the credit balances in
current account held by the said banks with

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such banking company;
for the purposes of computation of liabilities,
the aggregate of the liabilities of India, a
subsidiary bank, a corresponding new bank, a
regional rural bank, another banking company,
a co- operative bank or any other financial
institution notified by the Central Government
in this behalf, shall be reduced by the aggregate
of the liabilities of all such banks and
institutions to the banking company;
(d) the expression "co-operative bank"
shall have the meaning
assigned to it in clause (cci) of section56.
1 [(1A) If the balance held by such banking company at the close
of business on any day is below the minimum specified under sub-
section (1), such banking company shall, without prejudice to the
provisions of any other law for the time being in force, be liable to
pay to the Reserve Bank, in respect of that day, penal interest at a
rate of three per cent. above the bank rate on the amount by
which such balance falls short of the specified minimum, and if the
shortfall continues further, the penal interest so charged shall be
increased to a rate of five per cent. above the bank rate in respect
of each subsequent day during which the default continues.
(1B) Notwithstanding anything contained in this section, if the
Reserve Bank is satisfied, on an application in writing by the
defaulting banking company, that such defaulting banking
company had sufficient cause for its failure to comply with the
provisions of sub-section (1), it may not demand the payment of
the penal interest.
(1C) The Reserve Bank may, for such period and subject to such
conditions as may be specified, grant to any banking company
such exemptions from the provisions of this section as it thinks fit
with reference to all or any of its officesor with reference to the
whole or any part of its assets and liabilities.]
(2 ) The Reserve Bank may, for the purposes of this section and
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section 24, specify from time to time, with reference to any
transaction or class of transactions, that such transaction or
transactions shall be regarded as liability in India of a banking
company and, if any question arises as to whether any transaction
or class of transactions shall be regarded for the purposes of this
section and section 24 as liability in India of a banking company,
the decision of the Reserve Bank thereon shall be final.]
19. Restriction on nature of subsidiary companies
1 [(1) A banking company shall not form any subsidiary company
except a subsidiary company formed for one or more of the
following purposes, namely: -

(a) the undertaking of any business which, under clauses (a) to

(o) of sub- section (3) of section 6, is permissible for a banking
company to undertake, or

(b) with the previous permission in writing of the Reserve

Bank, the carrying on of the business of banking exclusively
outside India, or

(c) the undertaking of such other business, which the Reserve

Bank may, with the prior approval of the Central Government,
consider to be conducive to the spread of banking in India or to
be otherwise useful or necessary in the public interest.

Explanation. -For the purposes of section 8, a banking company

shall not be deemed, by reason of its forming or having a
subsidiary company, to be engaged indirectly in the business
carried on by such subsidiary company.]

(2) Save as provided in sub-section (1), no banking company shall

hold shares in any company, whether as pledgee, mortgagee or
absolute owner, of an amount exceeding thirty per cent of the
paid-up share capital of that company or thirty per cent of its own
paid-up share capital and reserves, whichever is less:

PROVIDED that any banking company which is on the date any shares in
contravention of the provisions of this sub-section shall not be liable to
any penalty therefore if it reports the matter without delay to the Reserve
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Bank and if it brings its holding of shares into conformity with the said
provisions within such period, not exceeding two years, as the Reserve
Bank may think fit to allow.

(3) Save as provided in sub-section (1) and notwithstanding

anything contained in sub-section (2), a banking company shall
not, after the expiry of one year from the date of the
commencement of this Act, hold shares, whether as pledgee,
mortagagee or absolute owner, in any company in the
management of which any Managing Director or manager of the
banking company is in any manner concerned or interested.

2 (4) Save as provided in clause (c) of sub-section (1), a banking

company may form a subsidiary company to carry on the business
of credit information in accordance with the Credit Information
Companies (Regulation) Act, 2005."

1[20. Restrictions on loans and advances

(1) Notwithstanding anything to the contrary contained in section
77 of the Companies Act, 1956 (1 of 1956), no banking company
shall,-

(a) grant any loans or advances on the security of its own shares,
or-

(b) enter into any commitment for granting any loan or

advance to or on behalf of-

(i) any of its Directors,

(ii) any firm in which any of its Directors is interested as

partner, manager, employee or guarantor, or

(iii) any company [not being a subsidiary of the banking

company or a company registered under section 25 of the
Companies Act, 1956 (1 of 1956), or a Government
company] of which 2 [or the subsidiary or the holding
company of which] any of the Directors of the banking
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company is a Director, Managing agent, manager, employee
or guarantor or in which he holds substantial interest, or

(iv) any individual in respect of whom any of its Directors is

a partner or guarantor.

(2) Where any loan or advance granted by a banking company is

such that a
commitmentforgrantingitcouldnothavebeenmadeifclause(b)ofsub
-section
(1) had been in force on the date on which the loan or advance
was made, or is granted by a banking company after the
commencement of section 5 of the Banking Laws (Amendment)
Act, 1968(58 of 1968), but in pursuance of a commitment entered
into before such commencement, steps shall be taken to recover
the amounts due to the banking company on account of the loan,
or advance together with interest, if any, due thereon within the
period stipulated at the time of the grant of the loan or advance, or
where no such period has been stipulated, before the expiry of
one year from the commencement of the said section5:
PROVIDED that the Reserve Bank may, in any case, on an application in
writing made to it by the banking company in this behalf, extend the
period for the recovery of the loan or advance until such date, not being a
date beyond the period of three years from the commencement of the said
section 5, and subject to such terms and conditions, as the Reserve Bank
may deemfit:

PROVIDED FURTHER that this sub-section shall not apply if and when the
Director concerned vacates the office of the Director of the banking
company, whether by death, retirement, resignation or otherwise.

(3) No loan or advance, referred to in sub-section (2), or any part

thereof shall be remitted without the previous approval of the
Reserve Bank, and any remission without such approval shall be
void and of no effect.
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(4) Where any loan or advance referred to in sub-section (2),
payable by any person, has not been repaid to the banking
company within the period specified in that subsection, then, such
person shall, if he is a Director of such banking company on the
date of the expiry of the said period, be deemed to have vacated
his office as such on the said date.

Explanation.--In this section-

(a) "loans or advance" shall not include any transaction which

the Reserve Bank may, having regard to the nature of the
transaction, the period within which, and the manner and
circumstances in which, any amount due on account of the
transaction is likely to be realised, the interest of the
depositors and other relevant considerations, specify by
general or special order as not being a loan or advance for the
purpose of this section;

(b) "Director" include a member of any board or committee in

India constituted by a banking company for the purpose of
Managing, or for the purpose of advising it in regard to the
management of, all or any of its affairs.

(5) If any question arises whether any transaction is a loan or

advance for the purposes of this section, it shall be referred to the
Reserve Bank, whose decision thereon shall be final.]

1[20A. Restrictions on power to remit debts

Notwithstanding anything to the contrary contained in section
293 of the CompaniesAct,1956(1of1956),a banking company shall
not, except with the prior approval of the Reserve Bank, remit in
whole or in part any debt due to it by-

(a) any of its Directors,or

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(b) any firm or company in which any of its Directors is
interested asDirector, partner, Managing agent or guarantor,or

(c) any individual if any of its Directors is his partner

orguarantor.

(2) Any remission made in contravention of the provisions of sub-

section (1) shall be void and of noeffect.]

21. Power of Reserve Bank to control advances by

banking companies

(1) Where the Reserve Bank is satisfied that it is necessary or

expedient in the public interest 1 [or in the interests of
depositors] 2 [ or banking policy] so to do, it may determine the
policy in relation to advances to be followed by banking
companies generally or by any banking company in particular,
and when the policy has been so determined, all banking
companies or the banking company concerned, as the case may
be, shall be bound to follow the policy as so determined.

(a) Without prejudice to the generality of the power vested

in the Reserve Bank under sub-section (1) the
Reserve Bank may give directions to banking
companies, either generally or to any banking
company or group of banking companies in
particular, 3[as to- the purposes for which
advances may or may not be made,

(b) the margins to be maintained in respect of secured advances,

(c) the maximum amount of advances or other financial

accommodation which, having regard to the paid-up capital,
reserves and deposits of a banking company and other relevant
considerations, may be made by that banking company to any
one company, firm, association of persons or individual,

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(d) the maximum amount up to which, having regard to the
considerations referred to in clause (c),guarantees may be
given by a banking company on behalf of any one company,
firm, association of persons or individual, and

(e) the rate of interest and other terms and conditions on which
advances or other financial accommodation may be made or
guarantees may be given.]

1 [(3) Every banking company shall be bound to comply with any

directions given to it under this section.]

2[21A. Rates of interest charged by banking companies not to be

subject to scrutiny by courts

Notwithstanding anything contained in the Usurious Loans Act,

1918 (10 of 1918), or any other law relating to indebtedness in
force in any State, a transaction between a banking company and
its debtor shall not be re-opened by any court on the ground that
the rate of interest charged by the banking company in respect of
such transaction is excessive.]

22. Licensing of banking companies

3 [(1) Save as hereinafter PROVIDED, no company shall carryon

banking business in India unless it holds a licence issued in that
behalf by the Reserve Bank and any such licence may be issued
subject of such conditions as the Reserve Bank may think fit to
impose.]

(2) Every banking company inexistence on the commencement of

this Act, before the expiry of six months from such
commencement, and every other company before commencing
banking business 4 [in India], shall apply in writing to the Reserve
Bank for a licence under this section:

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PROVIDED that in the case of a banking company in existence on the
commencement of this Act, nothing in sub-section (1) shall be deemed to
prohibit the company from carrying on banking business until it is
granted a licence in pursuance of 1 [this section] or is by notice in writing
informed by the Reserve Bank that a licence cannot be granted to it:

PROVIDED FURTHER that the Reserve Bank shall not give a notice as
aforesaid to a banking company in existence on the commencement of this
Act before the expiry of the three years referred to in sub-section (1) of
section 11 or of such further period as the Reserve Bank may under that
sub- section think fit to allow.

(3) Before granting any licence under this section, the Reserve
Banking may require to be satisfied by an inspection of the
books of the company or otherwise that 2[***] the following
conditions are fulfilled ,namely:-

3 [(a) that the company is or will be in a position to pay its

present or future depositors in full as their claims accrue;

(b) that the affairs of the company are not being, or are not
likely to be, conducted in a manner detrimental to the future
depositors;]

4 [(c) that the general character of the proposed management

of the company will not be prejudicial to the public interest or
the interest of its depositors;

(d) that the company has adequate capital structure and earning
prospects;

(e) that the public interest will be served by the grant of a

licence to the company to carry on banking business in India;

(f) that having regard to the banking facilities available in the

proposed principal area of operations of the company, the
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potential scope for expansion of banks already in existence in
the area and other relevant factors the grant of the licence
would not be prejudicial to the operation and consolidation of
the banking system consistent with monetary stability and
economic growth;
any other condition, the fulfilment of which would, in the
opinion of the Reserve Bank, be necessary to ensure that the
carrying on of banking business in India by the company will not
be prejudicial to the public interest or the interests of the
depositors.]

1 [(3A) Before granting any licence under this section to a

company incorporated outside India, the Reserve Bank may
require to be satisfied by an inspection of the books of the
company or otherwise that the conditions specified in sub- section
(3) are fulfilled and that the carrying on of banking business by
such company in India will be in the public interest and that the
Government or law of the country in which it is incorporated does
not discriminate in any way against banking companies registered
in India and that the company complies with all the provisions of
this Act applicable to banking companies incorporated outside
India.]

2 [(4) The Reserve Bank may cancel a licence granted to a banking

company under this section-

(i) if the company ceases to carry on banking business in India; or

(ii) if the company at any time fails to comply with any of the
conditions imposed upon it under sub-section (1);or

(iii) if at any time, any of the conditions referred to in sub-

section (3) 3[and sub-section (3A)] is not fulfilled:

PROVIDED that before cancelling a licence under clause (ii) or clause (iii)
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of this sub-section on the ground that the banking company has failed to
comply with or has failed to fulfil any of the conditions referred to therein,
the Reserve Bank, unless it is of opinion that the delay will be prejudicial
to the interests of the company's depositors or the public, shall grant to
the company on such terms as it may specify, an opportunity of taking the
necessary steps for complying with or fulfilling such condition.
(5) Any banking company aggrieved by the decision of the Reserve
Bank cancelling a licence under this section may, within thirty
days from the date on which such decision is communicated to it,
appeal to the Central Government The decision of the Central
Government where an appeal has been preferred to it under sub-
section (5) or of the Reserve Bank where no such appeal has been
preferred shall be final.]

1[23. Restrictions on opening of new, and transfer of existing, places

of business

(1) Without obtaining the prior permission of the Reserve Bank-

(a) no banking company shall open a new place of business in

India or change otherwise than within the same city, town or
village, the location of an existing place of business situated in
India; and

(b) no banking company incorporated in India shall open a new

place of business outside India or change, otherwise than
within the same city, town or village in any country or area
outside India, the location of an existing place of business
situated in that country or area:

PROVIDED that nothing in this sub-section shall apply to the

opening for a period not exceeding one month of a
temporary place of business within a city, town or village or
the environs thereof within which the banking company
already has a place of business, for the purpose of affording
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banking facilities to the public on the occasion of an
exhibition, a conference or a mela or any other like occasion.

(2) Before granting any permission under this section, the Reserve
Bank may require to be satisfied by an inspection under section
35 or otherwise as to the financial condition and history of the
company, the general character of its management, the adequacy
of its capital structure and earning prospects and that public
interest will be served by the opening or, as the case may be,
change of location, of the place of business.

(3) The Reserve Bank may grant permission under sub-section (1)
subject to such conditions as it may think fit to impose either
generally or with reference to any particular case.
Where, in the opinion of the Reserve Bank, a banking company
has, at any time, failed to comply with any of the conditions
imposed on it under this section, the Reserve Bank may, by order
in writing and after affording reasonable opportunity to the
banking company for showing cause against the action proposed
to be taken against it, revoke any permission granted under this
section.

1 [(4A) Any regional rural bank requiring the permission of the

Reserve Bank under this section shall forward its application to
the Reserve Bank through the National Bank which shall give its
comments on the merits of the application and send it to the
Reserve Bank:

PROVIDED that the regional rural bank shall also send an

advance copy of the application directly to the Reserve
Bank.]

(4) For the purpose of this section "place of business" includes any
sub-office, pay office, sub pay office and any place of business at
which deposits are received, cheques cashed or moneys lent.]
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24. Maintenance of a percentage of assets

(1)2[***]

(2)3[***]
4 [(2A) A scheduled bank, in addition to the average daily balance
which it is, or may be, required to maintain under section 42 of
the Reserve Bank of India Act, 1934 (2 of 1934) and every other
banking company, in addition to the cash reserve which it is
required to maintain under section 18, shall maintain in India,
assets, the value of which shall not be less than such percentage
not exceeding forty per cent, of the total of its demand and time
liabilities in India is on the last Friday of the second preceding
fortnight as the Reserve Bank may, by notification in the Official
Gazette, specify from time to time and such assets shall to
maintained, in such form and manner, as may be specified in such
notification.]

(2B) 5[***]
6 [(3) For the purpose of ensuring compliance with the provisions
of this section, every banking company shall, not later than twenty
days after the end of the month to which it relates, furnish to the
Reserve Bank in the prescribed form and manner a monthly
return showing particulars of its assets maintained in accordance
with this section, and its demand and time liabilities in India at the
close of business on each alternate Friday during the month, or if
any such Friday is a public holiday, at the close of business on the
preceding workingday:
PROVIDED that every Regional Rural Bank shall also furnish a copy of
the said return to the National Bank.]
(4)(a) If on any alternate Friday or, if such Friday is a public
holiday, on the preceding working day, the amount maintained by
a banking company at the close of business on that dayfalls below
the minimum prescribed by or under 1 [***] sub-section (2A)
such banking company shall be liable to pay to the Reserve Bank
in respect of that day's default, penal interest for that day at
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therate of three per cent per annum above the bank rate on the
amount by which the amount actually maintained falls short of the
prescribed minimum on that day; and
(b) If the default occurs again on the next succeeding alternate
Friday, or, if such Friday is a public holiday, on the preceding
working day, and continues on succeeding alternate Fridays or
preceding working days, as the case may be, the rate of penal
interest shall be increased to a rate of five per cent per annum
above the bank rate on each such shortfall in respect of that
alternate Friday and each succeeding alternate Friday or
preceding working day, if such Friday is a public holiday, in which
the default continues.
(5)(a)Without prejudice to the provisions of sub-section (3), the
Reserve Bank may require a banking company to furnish to it are
turn in the form and manner specified by it showing particulars of
its assets maintained in accordance with this section and its
demand and time liabilities in India, as at the close of business on
each day of a month; and
(b) Without prejudice to the provisions of sub-section (4), on the
failure of a banking company to maintain as on any day, the
amount so required to be maintained by or under 2 [***] sub-
section (2A) the Reserve Bank may, in respect of such default,
require the banking company to pay penal interest for that day as
PROVIDED in clause (a) of sub-section (4) and if the default
continues on the next succeeding working day, the penal interest
may be increased as PROVIDED in clause (b) of sub-section (4) for
the concerned days.
(6)(a) The penalty payable under sub-section (4) and sub-section
(5) shall be paid within a period of fourteen days from the date on
which a notice issued by the Reserve Bank demanding payment of
the same is served on the banking company and in the event of
failure of the banking company to pay the same within such
period, the penalty may be levied by a direction of the principal
civil court having jurisdiction in the area where an office of the
defaulting banking company is situated, such direction to be made
only upon an application made by the Reserve Bank in this behalf
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to the court; and
(b) When the court makes a direction under clause (a), it shall
issue a certificate specifying the sum payable by the banking
company and every such certificate shall be enforceable in the
same manner as if it were a decree made by the court in a suit.
(7) When under the provisions of clause (b) of sub-section (4),
penal interest at the increased rate of five per cent, above the
bank rate has become payable by a banking company, if thereafter
the amount required to be maintained on the next succeeding
alternate Friday, or if such Friday is a public holiday, the next
preceding working day, is still below the prescribed minimum,
every Director, manager or secretary of the banking company,
who is knowingly and willfully a party to the default, shall be
punishable with fine which may extend to five hundred rupees
and with a further fine which may extend to five hundred rupees
for each subsequent alternate Friday or the preceding working
day, as the case may be, on which the default continues.
(8) Notwithstanding anything contained in this section, if the
Reserve Bank is satisfied, on an application in writing by the
defaulting banking company, that the banking company had
sufficient cause for its failure to comply with the provisions of 1
[***] sub-section (2A), the Reserve Bank may not demand the
payment of the penal interest.
Explanation.--In this section, the expression "public holiday" means a day
which is a public holiday under the Negotiable Instruments Act, 1881 (26
of 1881)].
25. Assets in India

2 [(1) The assets in India of every banking company at the close of

business on the last Friday of every quarter or, if that Friday is a
public holiday under the Negotiable Instruments Act, 1881 (26 of
1881), at the close of the business on the preceding working day,
shall not be less than seventy-five percent of its demand and time
liabilities in India.
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(2) Every banking company shall, within one month from the end
of every quarter, submit to the Reserve Bank a return in the
prescribed form and manner of the assets and liabilities referred
to in sub-section (1) as at the close of business on the last Friday
of the previous quarter, or, if that Friday is a public holiday under
the Negotiable Instruments Act, 1881 (26 of 1881) at the close of
business on the preceding working day:]

rural bank shall also furnish a copy of the said return to the
National Bank.]

(3) For the purposes of this section,-

2 [(a) "assets in India" shall be deemed to include export bills

drawn in, and import bills drawn on and payable in India and
expressed in such currencies as the Reserve Bank may from
time to time approve in this behalf and also such securities as
the Reserve Bank may approve in this behalf notwithstanding
that all or any of the said bills or securities are held outside
India;]

3 [(b) "liabilities in India" shall not include the paid-up capital

or the reserves or any credit balance in the profit and loss
account of the banking company;]

4[(c)] "quarter" means the period of three months ending on the

last day of March, June, September or December.

26. Return of unclaimed deposits

Every banking company shall, within thirty days after the close of
each calendar year, submit a return in the prescribed form and
manner to the Reserve Bank as at the end of such calendar year of
all accounts 5 [in India] which have not been operated upon for
ten years 6[* **]:
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PROVIDED that in the case of money deposited for a fixed period the said
term of ten years shall be reckoned from the date of the expiry of such
fixed period:
1 [PROVIDED FURTHER that every regional rural bank
shall also furnish a copy of the said return to the National
Bank.]

2 [26A. Establishment of Depositor Education and Awareness Fund

(1) The Reserve Bank shall establish a Fund to be called the

"Depositor Education and Awareness Fund" (hereafter in this
section referred to as the "Fund").
(2) There shall be credited to the Fund the amount to the credit of
any account in India with a banking company which has not been
operated upon for a period of ten years or any deposit or any
amount remaining unclaimed for more than ten years, within a
period of three months from the expiry of the said period of ten
years:
PROVIDED that nothing contained in this sub-section shall prevent a
depositor or any other claimant to claim his deposit or unclaimed amount
or operate his account or deposit account from or with the banking
company after the expiry of said period of ten years and such banking
company shall be liable to repay such deposit or amount at such rate of
interest as may be specified by the Reserve Bank in this behalf.
(3) Where the banking company has paid outstanding amount
referred to in subsection (2) or allowed operation of such account
or deposit, such banking company may apply for refund of such
amount in such manner as may be specified by the authority or
committee referred to in sub-section(5).
(4) The Fund shall be utilised for promotion of depositors'
interests and for such other purposes which may be necessary for
the promotion of depositors' interests as may be specified by the
Reserve Bank from time to time.
(5) The Reserve Bank shall, by notification in the Official Gazette,
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specify an authority or committee, with such members as the
Reserve Bank may appoint, to administer the Fund, and to
maintain separate accounts and other relevant records in relation
to the Fund in such forms as may be specified by the Reserve
Bank.
(6) It shall be competent for the authority or committee appointed
under subsection (5) to spend moneys out of the Fund for
carrying out the objects for which the Fund has been established.]
27. Monthly returns and power to call for other returns and
information
(1) Every banking company shall, before me close of the month
succeeding that to which it relates, submit to the Reserve Bank a
return in the prescribed form and manner showing its assets and
liabilities in India as at the close of business on the last Friday of
every month or if that Friday is a public holiday under the
Negotiable Instruments Act, 1881 (26 of 1881), at the close of
business on the preceding working day.

1 [(2) The Reserve Bank may at any time direct a banking

company to furnish it within such time as may be specified by the
Reserve Bank, with such statements and information relating to
the business or affairs of the banking company (including any
business or affairs with which such banking company is
concerned) as the Reserve Bank may consider necessary or
expedient to obtain for the purposes of this Act, and without
prejudice to the generality of the foregoing power may call for
information every half-year regarding 2 [the investments of a
banking company and the classification of its advances in respect
of industry, commerce and agriculture].]

3 [(3). Every regional rural bank shall submit a copy of the return
which it submits to the Reserve Bank under sub-section (1) also
to the National Bank and the powers exercisable by the Reserve
Bank under sub-section (2) may also be exercised by the National
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Bank in relation to regional rural banks.]

4[28. Power to publish information

The Reserve Bank or the National Bank, or both, if they consider it

in the public interest so to do, may 5 [publish -

(a) any information obtained by them under this Act in such

consolidated form as they think fit;

(b) in such manner as they may consider proper, any credit

information disclosed under the Credit Information Companies
(Regulation) Act,2005.]

29. Accounts and balance-sheet

(1) At the expiration of each calendar year 1 [or at the expiration

of a period of twelve month sending with such date2 as the
Central Government may, by notification in the Official Gazette,
specify in this behalf,] every banking company incorporated 3 [in
India], in respect of all business transacted by it, and every
banking company incorporated 4 [outside India], in respect of all
business transacted through its branches 5 [in India], shall
prepare with reference to 6 [that year or period, as the case may
be,] a balance-sheet and profit and loss account as on the last
working day of 7 [that year or the period, as the case may be] in
the Forms set out in the Third Schedule or as near thereto as
circumstances admit:

8 [PROVIDED that with a view to facilitating the transition

from one period, of accounting to another period of-accounting
under this sub-section, the Central Government may, by order
published in the Official Gazette, make such provisions as it
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considers necessary or expedient for the preparation of, or for
other matters relating to, the balance sheet or profit and loss
account in respect of the concerned year or period, as the case
maybe.]

(2) The balance-sheet and profit and loss account shall be signed-

(a) in the case of a banking company incorporated 9 [in

principal officer of the company and where there are more
than three Directors of the company, by at least three of those
Directors, or where there are not more than three Directors, by
all the Directors, and

(b) in the case of a banking company incorporated 10[outside

India] by the manager or agent of the principal office of the
company 11[in India].
(3) Notwithstanding that the balance-sheet of a banking company
is under sub- section (I) required to be prepared in a form other
than the form 1 [set out in PartI -of Schedule VI to the Companies
Act, 1956 (1 of 1956)], the requirements of that relating to the
balance-sheet and profit and loss account of a company shall, in so
far as they are not inconsistent with this Act, apply to the balance-
sheet or profit and loss account, as the case may be, of a banking
company.

2 [(3A) Notwithstanding anything to the contrary contained in

sub-section (3) of section 210 of the Companies Act, 1956 (1 of
1956), the period to which the profit and loss account relates
shall, in the case of a banking company, be the period ending with
the last working day of the year immediately preceding the year in
which the annual general meeting is held.]

3 [Explanation.--In sub-section (3A), "year" means the year or, as

the case may be, the period referred to in sub-section (1).]
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The Central Government, after giving not less than three months'
notice of its mention so to do by a notification in the Official Gazette,
may from time to time by alike notification amend the Form set out
in the Third Schedule 4[29A. Power in respect of associate
enterprises

(1) The Reserve Bank may, at any time, direct a banking company
to annex to its financial statements or furnish to it separately,
within such time and at such intervals as may be specified by the
Reserve Bank, such statements and information relating to the
business or affairs of any associate enterprise of the banking
company as the Reserve Bank may consider necessary or
expedient to obtain for the purpose of this Act.
(2) Notwithstanding anything to the contrary contained in the
Companies Act, 1956(1 of 1956), the Reserve Bank may, at any
time, cause an inspection to be made of any associate enterprise of
a banking company and its books of account jointly by one or
more of its officers or employees or other persons along with the
Board or authority regulating such associate enterprise.
(3) The provisions of sub-sections (2) and (3) of section 35 shall
apply mutatis mutandis to the inspection under this section.
Explanation.--"associate enterprise" in relation to a banking company
includes an enterprise which--
(i) is a holding company or a subsidiary company of the banking
company; or
(ii) is a joint venture of the banking company; or

(iii) is a subsidiary company or a joint venture of the holding

company of the banking company; or
(iv) controls the composition of the Board of Directors or other
body governing the banking company; or
(v) exercises, in the opinion of the Reserve B a nk , significant
influence on the banking company in taking financial or policy
decisions; or
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(vi) is able to obtain economic benefits from the activities of the
banking company.]
1 [(1) The balance-sheet and profit and loss account prepared in
accordance with section 29 shall be audited by a person duly
qualified under any law for the time being in force to be an auditor
of companies.]

2[(1A) Notwithstanding anything contained in any law for the

time being in force or in any contract to the contrary, every
banking shall, before appointing re- appointing or removing any
auditor or auditors, obtain the previous approval of the Reserve
Bank.

(1B)Without prejudice to anything contained in the

Companies Act, 1956 (1 of 1956), or any other law for the time
being in force, where the Reserve Bank is of opinion that it is
necessary in the public interest or in the interest of the banking
company or its depositors so to do, 3 [it may at any time by order
direct that a special audit of the banking company's accounts, for
any such transaction or class of transactions or for such period or
periods as may be specified in the order, shall be conducted and
may by the same or a different order either appoint a person duly
qualified under any law for the time being in
force to be an auditor of companies or direct the auditor of the
banking company himself to conduct such special audit] and
the auditor shall comply with such directions and make a
report of such audit to the Reserve Bank and forward a copy
thereof to the company.

(1C) The expenses of, or incidental to 1[the special audit]

specified in the order made by the Reserve Bank shall be borne
by the banking company.]

(2) The auditor shall have the powers of, exercise the functions

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vested in, and discharge the duties and be subject to the liabilities
and penalties imposed on, auditors of
companies by 2[section227 of the Companies
Act, 1956 (1 of 1956), 3 [,and auditors, if any, appointed by the
law establishing, constituting or forming the banking company
concerned.]

(3) In addition to the matters which under the aforesaid Act the
auditor is required to state in his report, he shall, in the case of a
banking company incorporated 4[in India], state in his report,-

(a) whether or not the information and explanation required

by him have been found to be satisfactory;

(b) whether or not the transactions of the company which have

come to his notice have been within the powers of the
company;

(c) whether or not the returns received from branch offices of

the company have been found adequate for the purposes of
his audit;

(d) whether the profit and loss account shows a true balance
5[of profit or loss]for the period covered by such account;

(e) any other matter which he considers should be brought to

the notice of the shareholders of the company.
30. Submission of returns
The accounts and balance-sheet referred to in section 29 together
with the auditor's report shall be published in the prescribed
manner and three copies thereof shall be furnished as returns to
the Reserve Bank within three months from the end of the period
to which they refer:

PROVIDED that the Reserve Bank may in any case extend the said period

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of three months for the furnishing of such returns by a further period not
exceeding three months:

1[PROVIDED FURTHER that a regional rural bank shall furnish

such returns also to the National Bank.]

31. Copies of balance-sheets and accounts to be sent to Registrar

2 [(1) Where a banking company in any year furnishes its

accounts and balance- sheet in accordance with the provisions of
section 31, its hall at the same time send to the registrar three
copies of such accounts and balance-sheet and of the auditor's
report, and where such copies are so sent, it shall not be necessary
to file with the registrar, in the case of a public company, copies of
the accounts and balance-sheet and of the auditor's report, and, in
the case of a private company, copiesofthebalance-
sheetandoftheauditor'sreportasrequiredbysub-section
(1) of section 220 of the Companies Act, 1956 (1 of 1956); and the
copies so sent shall be chargeable with the same fee and shall be
dealt with in all respects as if they were filed in accordance with
that section.]

(2) When in pursuance of sub-section (2) of section 27 the Reserve

Bank requires any additional statement or information in
connection with the balance-sheet and accounts furnished under
section 31, the banking company shall, when supplying such
statement or information, send a copy thereof to the registrar.

32. Display of audited balance-sheet by companies incorporated

outside India

Every banking company incorporated 3 [outside India] shall, not

later than the first Monday in August of any year in which it
carries on business, display in a conspicuous place in its principal
office and in every branch office 4[in India] a copy of its last

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audited balance-sheet and profit and loss account prepared under
section 29, and shall keep the copy so displayed until replaced by
a copy of the subsequent balance-sheet and profit and loss
account so prepared, and every such banking company shall
display in like manner copies of its complete audited balance-
sheet and profit and loss account relating to its banking business
as soon as they are available, and shall keep the copies so
displayed until copies of such subsequent accounts are available.

33. Accounting provisions of this Act not retrospective

Nothing in this Act shall apply to the preparation of accounts by a

banking company and the audit and submission thereof in respect
of any accounting year which has expired prior to the
commencement of this Act, and notwithstanding the other
provisions of this Act, such accounts shall be prepared, audited
and submitted in accordance with the law in force immediately
before the commencement of this Act.

1[34A. Production of documents of confidential nature

(1) Notwithstanding anything contained in section 11 of the

Industrial Disputes Act, 1947 (14 of 1947), or any other law for
the time being in force, no banking company shall, in any
proceeding under the said Act or in any appeal or other
proceeding arising there from or connected therewith, be
compelled by any authority before which such proceeding is
pending to produce, or give inspection of, any of its books of
account or other document or furnish or disclose any statement or
information, when the banking company claims that such
document, statement or information is of a confidential nature
and that the production or inspection of such document or the
furnishing or disclosure of such statement or information would
involve disclosure of information relating to-

(a) any reserves not shown as such in its published balance-

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sheet; or

(b) any particulars not shown therein in respect of provisions

made for bad and doubtful debts and other usual or necessary
provisions.
If, in any such proceeding in relation to any banking company
other than the Reserve Bank of India, any question arises as to
whether any amount out of the reserves or provisions referred to
in sub-section (1) should be taken into account by the authority
before which such proceeding is pending, the authority may, if it
so thinks fit, refer the question to the Reserve Bank and the
Reserve Bank shall, after taking into account principles of sound
banking and all relevant circumstances concerning the banking
company, furnish to the authority a certificate stating that the
authority shall not take into account any amount as such reserves
and provisions of the banking company or may take them into
account only to the extent of the amount specified by it in the
certificate, and the certificate of the Reserve Bank on such
question shall be final and shall not be called in question in any
such proceeding.

1 [(3) For the purposes of this section "banking company"

includes the Reserve Bank, 2 (***), the Exim Bank, 3 [the
Reconstruction Bank], 4 [the National Housing Bank], the National
Bank, 5 [the Small Industries Bank] the State Bank of India, a
corresponding new bank, a regional rural bank and a subsidiary
bank.]

Section 35 - Inspection

(1) Notwithstanding anything to the contrary contained in 6

[section 235 of the Companies Act, 1956 (1 of 1956)], the Reserve
Bank at any time may, and on being directed so to do by the
Central Government shall, cause an inspection to be made by one
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or more of its officers of any banking company and its books and
accounts; and the Reserve Bank shall supply to the banking
company a copy of its report on such inspection.

7 [(1A) (a) Notwithstanding anything to the contrary contained in

any law for the time being in force and without prejudice to the
provisions of sub-section (1), the Reserve Bank, at any time, may
also cause a scrutiny to be made by any one or more of its officers,
of the affairs of any banking company and its books and accounts;
and

(b) A copy of the report of the scrutiny shall be furnished to the

banking company if the banking company makes a request for the
same or if any adverse action is contemplated against the banking
company on the basis of the scrutiny.]
(2) It shall be the duty of every Director or other officer 1 [or
employee] of the banking company to produce to any officer
making an inspection under sub- section (1) 2 [or a scrutiny
under sub-section (1A)] all such books, accounts and other
documents in his custody or power and to furnish him with any
statements and information relating to the affairs of the banking
company as the said officer may require of him within such time
as the said officer may specify.

(3) Any person making an inspection under sub-section (1) 3 [for a

scrutiny under sub-section (1A)] may examine on oath any
Director or other officer 4 [or employee] of the banking company
in relation to its business, and may administer an oath
accordingly.

(4) The Reserve Bank shall, if it has been directed by the Central
Government to cause an inspection to be made, and may, in any
other case, report to the Central Government on any inspection 5
[or scrutiny] made under this section, and the Central
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Government, if it is of opinion after considering the report that the
affairs of the banking company are being conducted to the
detriment of the interests of its depositors, may, after giving such
opportunity to the banking company to make a representation in
connection with the report as, in the opinion of the Central
Government, seems reasonable, by order in writing-

(a) prohibit the banking company from receiving fresh deposits;

(b) direct the Reserve Bank to apply under section 38 for the
winding up of the banking company:

PROVIDED that the Central Government may defer, for such

period as it may think fit, the passing of an order under this
sub-section, or cancel or modify any such order, upon such
terms and conditions as it may think fit to impose.

(5) The Central Government may, after giving reasonable notice to

the banking company, publish the report submitted by the
Reserve Bank or such portion thereof as may appear necessary.
[Explanation.--For the purpose of this section, the expression
"banking company" shall include-

(i) in the case of a banking company incorporated outside

India, all its branches in India; and

(ii) in the case of a banking company incorporated in India-

(a) all its subsidiaries formed for the purpose of carrying on

the business of banking exclusively outside India; and

(b) all its branches whether situated in India or outside India.]

2 [(6) The powers exercisable by the Reserve Bank under this

section in relation to regional rural banks may (without prejudice
to the exercise of such powers bythe Reserve Bank in relation to
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any regional rural bank whenever it considers necessary so to do)
be exercised by the National Sank in relation to the regional rural
banks, and accordingly, sub-sections (1) to (5) shall apply in
relation to regional rural banks as if every reference therein to the
Reserve Bank included also a reference to the National Bank.]

3[35A. Power of the Reserve Bank to give directions

(1) Where the Reserve Bank is satisfied that-

(a) in the 4[public interest];or

5[(aa) in the interest of banking policy; or]

(b) to prevent the affairs of any banking company being

conducted in a manner detrimental to the interests of the
depositors or in a manner prejudicial to the interests of the
banking company; or
to secure the proper management of any banking company
generally, it is necessary to issue directions to banking
companies generally or to any banking company in particular,
it may, from time to time, issue such directions as it deems fit,
and the banking companies or the banking company, as the
case may be, shall be bound to comply with such directions.

(2) The Reserve Bank may, on representation made to it or on its

own motion, modify or cancel any direction issued under sub-
section (1), and in so modifying or cancelling any direction may
impose such conditions as it thinks fit, subject to which the
modification or cancellation shall have effect.

4[Section 35AA – Power of Central Government to authorize Reserve

Bank for issuing directions to banking companies to initiate
insolvency resolution process –

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The Central Government may, by order, authorize the Reserve Bank to
issue directions to any banking company or banking companies to
initiate insolvency resolution process in respect of a default, under the
provisions of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).
Explanation- For the purposes of these section, “default” has the same
meaning assigned to it in clause (12) of section 3 of the Insolvency and
Bankruptcy Code, 2016.

Section 35AB – Power of Reserve Bank to issue directions in respect of

stressed assets.

(1) Without prejudice to the provisions of section 35A, the Reserve

Bank may, from time to time, issue directions to any banking
company or banking companies for resolution of stressed assets.
(2) The Reserve Bank may specify one or more authorities or
committees with such members as the Reserve Bank may appoint
or approve for appointment to advise any banking company or
banking companies on resolution of stressed assets]

Section 35B - Amendments of provisions relating to appointments of

Managing Directors, etc., to be subject to previous approval of the
Reserve Bank

(1) In the case of a banking company-

(a) no amendment of any provision relating to 1 [the maximum

permissible number of Directors or] the 2[appointment or re-
appointment or termination of appointment or remuneration
of a Chairman, a] 3 [Managing Director or any other Director,
whole-time or otherwise]or of a manager or a chief executive
officer by whatever name called, whether that provision be
contained in the company's memorandum or articles of
association, or in an agreement entered into by it, or in any

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resolution passed by the company in general meeting or by its
Board of Directors shall have effect unless approved by the
Reserve Bank;
(3) 4 [(b) no appointment or re-appointment or termination of
appointment of a Chairman, a Managing or whole-time Director,
manager or chief executive officer by whatever name called, shall
have effect unless such appointment, re-appointment or
termination of appointment is made with the previous approval of
the Reserve Bank.]
5[Explanation.--For the purpose of this sub-section, any
provision conferring any benefit or providing any amenity
or perquisite, in whatever form, whether during or after the
termination of the term of office6[of the Chairman or the
manager] or the chief executive officer by whatever name
called or the Managing Director, or any other Director,
whole-time or otherwise, shall be deemed to be a provision
relating to his remuneration.]

(1) Nothing contained in sections 1 [268 and 269, the proviso to

sub-section (3) of section 309, sections 310 and 311,the proviso to
section 387, and section 388](in so far as section 388 makes the 2
[provisions of sections 269, 310] and 311 apply in relation to the
manager of a company) of the Companies Act, 1956 (1 of 1956),
shall 3 [apply to any matter in respect of which the approval of the
Reserve Bank has to be obtained under sub-section(1)].

4[(2A) Nothing contained in section 198 of the Companies Act,

1956 (1 of 1956) shall apply to a banking company and the
provisions of sub-section (1) of section 309 and of section 387 of
that Act shall, in so far as they are applicable to a banking
company, have effect as if no reference had been made in the said
provisions to section 198 of that Act.]

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(2) No act done by a person 5 [as Chairman or a Managing or
whole-time Director]or a Director not liable to retire by rotation
or a manager or a chief executive officer by whatever name called,
shall be deemed to be invalid on the ground that it is subsequently
discovered that his 6[appointment or reappointment] had not
taken effect by reason of any of the provisions of this Act; but
nothing in this sub-section shall be construed as rendering valid
any act done by such person after his 7 [appointment or
reappointment] has been shown to the banking company not to
have had effect.]

36. Further powers and functions of Reserve Banks

(1) The Reserve Bank may-

(a) caution or prohibit banking companies or any banking

company in particular against entering into any particular
transaction or class of transactions, and generally give advice
to any banking company;
(b) on a request by the companies concerned and subject to the
provision of section 1 [44A], assist, as intermediary or
otherwise, in proposals for the amalgamation of such banking
companies;

(c) give assistance to any banking company by means of the

grant of a loan or advance to it under clause(3) of sub-section
(1) of section 18 of the Reserve Bank of India Act, 1934
(2of1934);

2 [(d) 3 [at any time, if it is satisfied that in the public interest

or in me interest of banking policy or for preventing the affairs
of the banking company being conducted in a manner
detrimental to the interests of the banking company or its
depositors it is necessary so to do,] by order in writing and on
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such terms and conditions as may be specified there in-

(i) require the banking company to call a meeting of its

Directors for the purpose of considering any matter relating
to or arising out of the affairs of the banking company; or
require an officer of the banking company to discuss any
such matter with an officer of the Reserve Bank;

(ii) depute one or more of its officers to which the

proceedings at any meeting of the Board of Directors of the
banking company or of any committee or of any other body
constituted by it; require the banking company to give an
opportunity to the officers so deputed to be heard at such
meetings and also require such officers to send a report of
such proceedings to the Reserve Bank;

(iii) require the Board of Directors of the banking company

or any committee or any other body constituted by it to give
in writing to any officer specified by the Reserve Bank in
this behalf at his usual address all notices of, and other
communications relating to, any meeting of the Board,
committee or other body constituted by it;

(iv) appoint one or more of its officers to observe the

manner in which the affairs of the banking company or of its
offices or branches are being conducted and make a report
thereon;
(v) require the banking company to make, within such time
as may be specified in the order, such changes in the
management as the Reserve Bank may consider
necessary1[***].]

(2) The Reserve Bank shall make an annual report to the Central
Government on the trend and progress of banking in the country,
with particular reference to its activities under clause(2) of
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section 17 of the Reserve Bank of India Act, 1934 (2 of 1934),
including in such report its suggestions, if any, for the
strengthening of banking business throughout the country.

(3) The Reserve Bank may appoint such staff at such places as it
considers necessary for the scrutiny of the returns, statements
and information furnished by banking companies under this Act,
and generally to ensure the efficient performance of its functions
under this Act.

2[36A. Certain provisions of the Act not to apply to certain banking

companies

(1) The provisions of section 11, sub-section (1) of section 12, and
sections 17, 18, 24 and 25 shall not apply to a banking company-

(a) which, whether before or after the commencement of the

Banking Companies (Amendment) Act, 1959 (33 of 1959), has
been refused a licence under section 22, or prohibited from
accepting fresh deposits by a compromise, arrangement or
scheme sanctioned by a court or by any order made in any
proceeding relating to such compromise, arrangement or
scheme, or prohibited from accepting deposits by virtue of any
alteration made in its memorandum; or

(b) whose licence has been cancelled under section 22, whether
before or after the commencement of the Banking Companies
(Amendment) Act, 1959 (33 of 1959).
Where the Reserve Bank is satisfied that any such banking
company as is referred to in sub-section (1) has repaid, or has
made adequate provision for repaying all deposits accepted by the
banking company, either in full or to the maximum extent
possible, the Reserve Bank may, by notice published in the Official
Gazette, notify that the banking company has ceased to be a
banking company within the meaning of this Act, and thereupon

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all the provisions of this Act applicable to such banking company
shall cease to apply to it, except as respects things done or omitted
to be done before such notice.]

 CONTROL OVER MANAGEMENT

36AA. Power of Reserve Bank to remove managerial and other

persons from office

(1) Where the Reserve Bank is satisfied that in the public interest
or for preventing the affairs of a banking company being
conducted in a manner detrimental to the interests of the
depositors or for securing the proper management of any banking
company it is necessary so to do, the Reserve Bank may, for
reasons to be recorded in writing, by order, remove from office,
with effect from such date as may be specified in the order, 2 [any
Chairman ,Director,] chief executive officer(by whatever name
called) or other officer or employee of the banking company.

(2) No order under sub-section (1) shall be made 3 [unless the

Chairman, Director] or chief executive officer or other officer or
employee concerned has been given a reasonable opportunity of
making a representation to the Reserve Bank against the
proposed order:

PROVIDED that if, in the opinion of the Reserve Bank, any delay
would be detrimental to the interests of the banking company
or its depositors, the Reserve Bank may, at the time of giving
the opportunity aforesaid or at any time thereafter, by order
direct that, pending the consideration of the representation
aforesaid, if any, 4 [the Chairman or, as the case may be,
Director or chief executive officer] or other officer or
employee, shall not, with effect from the date of such order--
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(a) 5[act as such Chairman or Director] or chief executive
officer or other officer or employee of the banking
company;
(b) in any way, whether directly or indirectly, be concerned
with, or take part in the management of, the banking
company.
)(a) Any person against whom an order of removal has been made
under sub- section (1) may, within thirty days from the date of
communication to him of the order, prefer an appeal to the
Central Government.

(b) The decision of the Central Government on such appeal,

and subject thereto, the order made by the Reserve Bank under
sub-section (I),shall be final and shall not be called into
question in any court.

(4) Where any order is made in respect of 1 [a Chairman, Director]

or chief executive officer or other officer or employee of a banking
company under sub- section (1), he shall cease to be 2 [a
Chairman or, as the case may be, a Director,]chief executive officer
or other officer or employee of the banking company and shall
not, in any way, whether directly or indirectly, be concerned with,
or take part in the management of, any banking company for such
period not exceeding five years as may be specified in theorder.

(5) If any person in respect of whom an order is made by the

Reserve Bank under sub-section (1) or under the proviso to sub-
section (2) contravenes the provisions of this section, he shall be
punishable with fine which may extend to two hundred and fifty
rupees for each day during which such contravention continues.

(6) Where an order under sub-section (1) has been made, the
Reserve Bank may, by order in writing, appoint a suitable person
in place of 3 [the Chairman or Director], or chief executive officer
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or other officer or employee who has been removed from his
office under that sub-section, with effect from such date as may be
specified in the order.

(7) Any person appointed as 4 [Chairman, Director or chief

executive officer] or other officer or employee under this section
shall,-

(a) hold office during the pleasure of the Reserve Bank and
subject thereto for a period not exceeding three years or such
further periods not exceeding three years at a time as the
Reserve Bank may specify;
(b) not incur any obligation or liability by reason only of
his being a 1 [Chairman, Director or chief executive officer]
or other officer or employeeor for anything done or omitted to
be done in good faith in the execution of the duties of his office
or in relationthereto.

(8) Notwithstanding anything contained in any law or in any

contract, memorandum or articles of association, on the removal
of a person from office under this section, that person shall not be
entitled to claim any compensation for the loss or termination of
office.

Section 36AB - Power of Reserve Bank to appoint additional Directors

(1) If the Reserve Bank is of 2 [opinion that in the interest of

banking policy or in the public interest or] in the interests of the
banking company or its depositors it is necessary so to do, it may,
from time to time by order in writing, appoint, with effect from
such date as may be specified in the order, one or more persons to
hold office as additional Directors of the banking company:

3[***]

(2) Any person appointed as additional Director in pursuance of this

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section-

(a) shall hold office during the pleasure of the Reserve Bank
and subject thereto for a period not exceeding three years or
such further periods not exceeding three years at a time as the
Reserve Bank may specify;

(b) shall not incur any obligation or liability by reason only of

his being a Director or for anything done or omitted to be done
in good faith in the execution of the duties of his office or in
relation there to; and

(c) shall not be required to hold qualification-shares in the

banking company.

(3) For the purpose of reckoning any proportion of the total

number of Directors of the banking company, any additional
Director appointed under this section shall not be taken into
account.

36AC. Part IIA to override other laws

Any appointment or removal of a Director, chief executive officer
or other officer or employee in pursuance of section 36AA or
section 36AB shall have effect notwithstanding anything to the
contrary contained in the Companies Act, 1956 (1 of 1956) or any
other law for the time being in force or in any contract or any
other instrument.]

 SUSPENSION OF BUSINESS AND WINDING UP OF BANKING

COMPANIES

1[2[36B. High Court defined.-

In this Part and in Part IIIA "High Court", in relation to a banking

company, means the High Court exercising jurisdiction in the
place where the registered office of the banking company is
situated or, in the case of a banking company incorporated outside
India, where its principal place of business in India is situated. ]]

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37. Suspension ofbusiness

The 3 [High Court] may on the application of a banking company

which is temporarily unable to meet its obligations make an order
(a copy of which it shall cause to be forwarded to the Reserve
Bank) staying the commencement or continuance of all actions
and proceedings against the company for a fixed period of time on
such terms and conditions as it shall think fit and proper, and may
from time to time extend the period so however that the total
period of moratorium shall not exceed six months.

(1) No such application shall be maintainable unless it is

accompanied by a report of the Reserve Bank indicating that in
the opinion of the Reserve Bank the banking company will be able
to pay its debts if the application isgranted:

PROVIDED that the 1 [High Court] may, for sufficient reasons,

grant relief under this section even if the application is not
accompanied by such report, and where such relief is granted,
the 2 [High Court] shall call for a report from the Reserve Bank
on the affairs of the banking company on receipt of which it
may either rescind any order already passed or pass such
further orders thereon as may be just and proper in the
circumstances.

3 [(3) When an application is made under sub-section (1), the

High Court may appoint a special officer who shall forthwith take
into his custody or under his control all the assets, books,
documents, effects and actionable claims to which the banking
company is or appears to be entitled and shall also exercise such
other powers as the High Court may deem fit to confer on him,
having regard to the interests of the depositors of the banking
company.]

4 [(4) Where the Reserve Bank is satisfied that the affairs of a

banking company in respect of which an order under sub-section
(1) has been made, are being conducted in a manner detrimental
to the interests of the depositors, it may make an application to
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the High Court for the winding up of the company, and where any
such application is made, the High Court shall not make any order
extending the period for which the commencement or
continuance of all actions and proceedings against the company
were stayed under that sub-section.]

5[38. Winding up by High Court.-

(1) Notwithstanding anything contained in section 391, section

392, section 433 and section 583 of the Companies Act, 1956 (1 of
1956), but without prejudice to its powers under sub-section (1)
of section 37 of this Act, the High Court shall order the winding up
of a banking company-

(a) if the banking company is unable to pay its debts; or

(a) if an application for its winding up has been made by the

Reserve Bank under section 37 or this section.

(2) The Reserve Bank shall make an application under this section
for the winding up of a banking company if it is directed so to do
by an order under clause (b) of sub-section (4) of section35.

(3) The Reserve Bank may make an application under this section
for the winding up of a banking company-

(a) if the banking company-

(i) has failed to comply with the requirements specified in

section 11;or

(ii) has by reason of the provisions of section 22 become

disentitled to carry on banking business in India; or

(iii) has been prohibited from receiving fresh deposits by an

order under clause (a) of sub-section (4) of section 35 or
under clause (b) of subsection (3A) of section 42 of the
Reserve Bank of India Act, 1934 (2 of 1934);or

(iv) having failed to comply with any requirement of this Act

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other than the requirements laid in section 11, has
continued such failure, or, having contravened any
provision of this Act continued such contravention beyond
such period or periods as may be specified in that behalf by
the Reserve Bank from time to time, after notice in writing
of such failure or contravention has been conveyed to the
banking company; or

(b) if in the opinion of the Reserve Bank-

(i) a compromise or arrangement sanctioned by a court in

respect of the banking company cannot be worked
satisfactorily with or without modifications; or

(ii) the returns, statements or information furnished to it

under or in pursuance of the provisions of this Act disclose
that the banking company is unable to pay its debts; or

(iii) the continuance of the banking company is prejudicial to

the interests of its depositors.
Without prejudice to the provisions contained in section 434 of
the Companies Act, 1956 (I of 1956) a banking company shall be
deemed to be unable to pay its debts if it has refused to meet any
lawful demand made at any of its offices or branches within two
working days, if such demand is made at a place where there is an
office, branch or agency of the Reserve Bank, or within five
working days, if such demand is made elsewhere, and if the
Reserve Bank certifies in writing that the banking company is
unable to pay its debts.

(4) A copy of every application made by the Reserve Bank under

sub-section (1) shall be sent by the Reserve Bank to the
registrar.]

1[38A. Court liquidator.-

(1) There shall be attached to every High Court a Court liquidator

to be appointed by the Central Government for the purpose of
conducting all proceedings for the winding up of banking
companies and performing such other duties in reference thereto
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as the High Court may impose.

2[***]

(4) Where having regard to the number of banking companies

wound up and other circumstances of the case, the Central
Government is of opinion that it is not necessary or expedient to
attach for the time being a Court liquidator to a High Court, it may,
from time to time, by notification in the Official Gazette, direct that
this section shall not have effect in relation to that High Court.]

3[39. Reserve Bank to be official liquidator.-

4[(1)] Notwithstanding anything contained in section 38A of this

Act or in section
448 or section 449 of the Companies Act, 1956(1 of 1956), where
in any proceeding for the winding up by the High Court of a
banking company, an application is made by the Reserve Bank in
this behalf, the Reserve Bank, the State Bank of India or any other
bank notified by the Central Government in this behalf or any
individual, as stated in such application shall be appointed as the
official liquidator of the banking company in such proceeding and
the liquidator, if any, functioning in such proceeding shall vacate
office upon such appointment.]
5 [(2) Subject to such directions as may be made by the High
Court, the remuneration of the official liquidator appointed under
this section, the cost and expenses of this establishment and the
cost and expenses of the winding up shall be met out of the assets
of the banking company which is being wound up, and
notwithstanding anything to the contrary contained in any other
law for the time being in force, no fees shall be payable to the
Central Government, out of the assets of the banking company.]

1[39A. Application of Companies Act to liquidators.-

(1) All the provisions of the Companies Act, 1956 (1 of 1956),

relating to a liquidator, in so far as they are not inconsistent with
this Act, shall apply to or in relation to a liquidator appointed
under section 38A or section39.
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(2) Any reference to the "official liquidator" in this Part and Part
IIIA shall be construed as including a reference to any liquidator
of a banking company.]

40. Stay of proceedings

Notwithstanding anything to the contrary contained in 2 [section

466 of the Companies Act, 1956 (1 of 1956)], the 3 [High Court]
shall not make any order staying the proceedings in relation to the
winding up of a banking company, unless the 4 [High Court] is
satisfied that an arrangement has been made whereby the
company can pay its depositors in full as their claims accrue.

5[41. Preliminary report by official liquidator.-

Notwithstanding anything to for the contrary contained in section
455 of the Companies Act, 1956 (1 of 1956), where a winding up
order has been made in respect of a banking company whether
before or after the commencement of the Banking Companies
(Second Amendment) Act, 1960 (37 of 1960), the official
liquidator shall submit a preliminary report to the High Court
within two months from the date of the winding up order or
where the winding up order has been made before such
commencement, within two months from such commencement,
giving the information required by that section so far as it is
available to him and also stating the amount of assets of the
banking company in cash which are in his custody or under his
control on the date of the report and the amount of its assets
which are likely to be collected in cash before the expiry of that
period of two months in order that such assets may be applied
speedily towards the making of preferential payments under
section 530 of the Companies Act, 1956, and in the discharge, as
far as possible, of the liabilities and obligations of the banking
company to its depositors and other creditors in accordance with
the provisions hereinafter contained; and the official liquidator
shall make for the purposes aforesaid every endeavour to collect
in cash as such of the assets of the banking company as
practicable.

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41A. Notice to preferential claimants and secured and unsecured
creditors

(1) Within fifteen days from the date of the winding up order of a
banking company or where the winding up order has been made
before the commencement of the Banking Companies (Second
Amendment) Act, 1960 (37 of 1960), within one month from such
commencement, the official liquidator shall, for the purpose of
making an estimate of the debts and liabilities of the banking
company (other that its liabilities and obligations to its
depositors), by notice served in such manner as the Reserve Bank
may direct, call upon—

(a) every claimant entitled to preferential payment under

section 530 of the Companies Act, 1956(1 of 1956),and

(b) every secured and every unsecured creditor, to send to the

official liquidator within one month from the date of the
service of the notice a statement of the amount claimed by him.

(2) Every notice under sub-section (1) sent to a claimant having a

claim under section 530 of the Companies Act, 1956 (1 of 1956),
shall state that if a statement of the claim is not sent to the official
liquidator before the expiry of the period of one month from the
date of the service, the claim shall not be treated as a claim
entitled to be paid under section 530 of the Companies Act, 1956,
in priority to all other debts but shall be treated as an ordinary
debt due by the banking company.

(3) Every notice under sub-section (1) sent to a secured creditor

shall require him to value his security before the expiry of the
period of one month from the date of the service of the notice and
shall state that if a statement of the claim together with the
valuation of the security is not sent to the official liquidator before
the expiry of the said period, then, the official liquidator shall
himself value the security and such valuation shall be binding on
the creditor.

(4) If a claimant fails of comply with the notice sent to him under
sub-section (1), his claim will not be entitled to be paid under
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section 530 of the Companies Act, 1956 (1 of 1956), in priority to
all other debts but shall be treated as an ordinary debt due by the
banking company; and if a secured creditor fails to comply with
the notice sent to him under sub-section (1), the official liquidator
shall himself value the security and such valuation shall be
binding on the creditor.]

42. Power to dispense with meetings of creditors, etc

Notwithstanding anything to the contrary contained in 1 [2

[section 460] of the Companies Act, 1956 (1 of1956)], the 3 [High
Court] may, in the proceedings for winding up a banking
company, dispense with any meetings of creditors or
contributories 4 [***]if it considers that no object will be secured
thereby sufficient to justify the delay and expense.

5[43. Booked depositors' credits to be deemed proved.-

In any proceeding for the winding up of a banking company, every

depositor of the banking company shall be deemed to have filed
his claim for the amount shown in the books of the banking
company as standing to his credit and, notwithstanding anything
to the contrary contained in 6 [section 474 of the Companies Act,
1956 (1 of 1956)], the High Court shall presume such claims to
have been proved, unless the official liquidator shows that there is
reason for doubting its correctness.]

7[43A. Preferential payments to depositors.-

(1) In every proceeding for the winding up of a banking company

where a winding up order has been made, whether before or after
the commencement of the Banking Companies (Second
Amendment) Act, 1960, (37 of1960) within three months from
the date of the winding up order or where the winding up order
has been made before such commencement, within three months
there from, the preferential payments referred to in section 530 of
the Companies Act, 1956 (1 of 1956), in respect of which
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statements of claims have been sent within one month from the
date of the service of the notice referred to in section 41 A, shall
be made by the official liquidator or adequate provision for such
payments shall be made by him.

(2) After the preferential payments as aforesaid have been made

or adequate provision has been made in respect thereof, there
shall be paid within the aforesaid period of three months-
(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 sum of two hundred and fifty rupees or the balance
at his credit, whichever is less, in priority to all other debts
from out of the remaining assets of the banking company
available for payment to general creditors:

PROVIDED that the sum total of the amounts paid under clause (a)
and clause
(b) to any one 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.

(3) Where within the aforesaid period of three months full

payment cannot be made of the amounts required to be paid
under clause (a) or clause (b) of sub- section (2) with the assets in
cash, the official liquidator shall pay within that period to every
depositor under clause (a) or, as the case may be, clause (b) of
that sub-section on a pro rata basis so much of the amount due to
the deposit or under that clause as the official liquidator is able to
pay with those assets; and shall pay the rest of that amount to
every such depositor as and when sufficient assets are collected
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by the official liquidator in cash.

(4) After payments have been made first to depositors in the

savings bank account and then to the other depositors in
accordance with the foregoing provisions, the remaining assets of
the banking company available for payment to general creditors
shall be utilised for payment on a pro rata basis of the debts of the
general creditors and of the further sums, if any, due to the
depositors; and after making adequate provision for payment on a
pro rata basis as aforesaid of the debts of the general creditors,
the official liquidator shall, as and when the assets of the company
are collected in cash, make payment on a pro rata basis as
aforesaid, of the further sums, if any, which may remain due to the
depositors referred to in clause (a) and clause (b) of sub-
section(2).

(5) In order to enable the official liquidator to have in his custody

or under his control in cash as much of the assets of the banking
company as possible, the securities given to every secured
creditor may be redeemed by the official liquidator-
(a) where the amount due to the creditor is more than the
value of the securities as assessed by him or, as the case may
be, as assessed by the official liquidator, on payment of such
value; and

(b) where the amount due to the creditor is equal to or less

than the value of the securities as so assessed, on payment of
the amount due:

PROVIDED that where the official liquidator is not satisfied with

the valuation made by the creditor, he may apply to the High
Court for making a valuation.

(6) When any claimant, creditor or depositor to whom any

payment is to be made in accordance with 1 [the provisions of this
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section], cannot be found or is not readily traceable, adequate
provision shall be made by the official liquidator for such
payment.

(7) For the purposes of this section, the payments specified in

each of the following clauses shall be treated as payments of a
different class, namely:-

(a) payments to preferential claimants under section 530 of

the Companies Act, 1956 (1of1956);

(b) payments under clause (a) of sub-section (2) to the

depositors in the savings bank account;

(c) payments under clause (b) of sub-section (2) to the other

depositors;

(d) payments to the general creditors and payments to the

depositors in addition to those specified in clause (a) and
clause (b) of sub-section(2).

(8) The payments of each different class specified in sub-section

(7) shall rank equally among themselves and be paid in full unless
the assets are insufficient to meet them, in which case they shall
abate in equal proportion.]]

2 [(9) Nothing contained in sub-sections (2), (3), (4),(7) and (8)

shall apply to a banking company in respect of the depositors of
which the Deposit Insurance Corporation is liable under section
16 of the Deposit Insurance Corporation Act, 1961, (47 of 1961).
(10) After preferential payments referred to in sub-section (1)
have been made or adequate provision has been made in respect
thereof, the remaining assets of the banking company referred to
in sub-section (9)available for payment to general creditors shall
be utilised for payment on pro rata basis of the debts of the
general creditors and of the sums due to the depositors:

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PROVIDED that where any amount in respect of any deposit
is to be paid by the liquidator to the Deposit Insurance
Corporation under section 21 of the Deposit Insurance
Corporation Act, 1961 (47 of 1961), only the balance, if any, left
after making the said payment shall be payable to the depositor.]

1[44. Powers of High Court in voluntary winding up.-

(1) Notwithstanding anything to the contrary contained in section

484 of the Companies Act, 1956 (1of 1956), no banking company
may be voluntarily wound up unless the Reserve Bank certifies in
writing that the company is able to pay in full all its debts to its
creditors as they accrue.

(2) The High Court may, in any case where a banking company is
being wound up voluntarily, make an order that the voluntary
winding up shall continue, but subject to the supervision of the
court.

(3) Without prejudice to the provisions contained in sections 441

and 521 of the Companies Act, 1956 (1 of 1956), the High Court
may of its own motion and shall on the application of the Reserve
Bank, order the winding up of a banking company by the High
Court in any of the following cases, namely:-

(a) where the banking company is being wound up voluntarily

and at any stage during the voluntary winding up proceedings
the company is not able to meet its debts as they accrue; or

(b) where the banking company is being wound up voluntarily

or is being wound up subject to the supervision of the court
and the High Court is satisfied that the voluntary winding up or
winding up subject to the supervision of the court cannot be
continued without detriment to the interests of the
depositors.]

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2[44A. Procedure for amalgamation of banking companies.-
(1) Notwithstanding anything contained in any law for the time
being in force, no banking company shall be amalgamated with
another banking company, unless a scheme containing the terms
of such amalgamation has been placed in draft 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, present either in person or by proxy
at a meeting called for the purpose.

(2) Notice of every such meeting as is referred to in sub-section (1)

shall be given to every shareholder of each of the banking
companies concerned in accordance with the relevant articles of
association indicating the time, place and object of the meeting,
and shall also be published at least once a week for three
consecutive weeks in not less than two newspapers which
circulate in the locality or localities where the registered offices of
the banking companies concerned are situated, one of such
newspapers being in a language commonly understood in the
locality or localities.

(3) Any shareholder, who has voted against the scheme of

amalgamation at the meeting or has given notice in writing at or
prior to the meeting of the company concerned or to the presiding
officer of the meeting that he dissents from the scheme of
amalgamation, shall be entitled, in the event of the scheme being
sanctioned by the Reserve Bank, to claim from the banking
company concerned, in respect of the shares held by him in that
company, their value as determined by the Reserve Bank when
sanctioning the scheme and such determination by the Reserve
Bank as to the value of the shares (o be paid to the dissenting
shareholder shall be final for all purposes.

(4) If the scheme of amalgamation is approved by the requisite

majority of shareholders in accordance with the provisions of this
section, it shall be submitted to the Reserve Bank for sanction and
shall, if sanctioned by the Reserve Bank by an order in writing
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passed in this behalf, be binding on the banking companies
concerned and also on all the shareholders thereof.

1[***]
(6) On the sanctioning of a scheme of amalgamation by the
Reserve Bank, the properly of the amalgamated banking company
shall, by virtue of the order of sanction, be transferred to and vest
in, and the liabilities of the said company shall, by virtue of the
said order be transferred to, and become the liabilities of, the
banking company which under the scheme of amalgamation is to
acquire the business of the amalgamated banking company,
subject in all cases to 1 [the provisions of the scheme as
sanctioned.]]

2 [(6A) Where a scheme of amalgamation is sanctioned by the

Reserve Bank under the provisions of this section, the Reserve
Bank may, by a further order in writing, direct that on such date
as may be specified therein the banking company (hereinafter in
this section referred to as the amalgamated banking company)
which by reason of the amalgamation will cease to function, shall
stand dissolved and any such direction shall take effect
notwithstanding anything to the contrary contained in any other
law.

(6B) Where the Reserve Bank directs a dissolution of the

amalgamated banking company, it shall transmit a copy of the
order directing such dissolution to the Registrar before whom the
banking company has been registered and on receipt of such
order the Registrar shall strike off the name of the company.

(6C) An order under sub-section (4) whether made before or after

the commencement of section 19 of the Banking Laws
(Miscellaneous Provisions) Act, 1963 (55 of 1963) shall be
conclusive evidence that all the requirements of this section
relating to amalgamation have been complied with, and a copy of
the said order certified in writing by an officer of the Reserve
Bank to be a true copy of such order and a copy of the scheme
certified in the tike manner to be a true copy thereof shall, in all

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legal proceedings (whether in appeal or otherwise and whether
instituted before or after the commencement of the said section
19), be admitted as evidence to the same extent as the original
order and the original scheme.]

3 [(7) Nothing in the foregoing provisions of this section shall

affect the power of the Central Government to provide for the
amalgamation of two or more banking companies 4[***] under
section 396 of the Companies Act, 1956 (1 of 1956):

PROVIDED that no such power shall be exercised by the Central

Government except after consultation with the Reserve Bank.]

5[ 6[44B.] Restriction on compromise or arrangement between

banking company and creditors.-
1 [(1)]Notwithstanding anything contained in any law for the time
being in force, no 2 [High Court] shall sanction a compromise or
arrangement between abanking company and its creditors or any
class of them or between such company and its members or any
class of them 3 [or sanction any modification in any such
compromise or arrangement unless the compromise or
arrangement or modification, as the case may be,] is certified by
the Reserve Bank 4 [in writing as not being incapable of being
worked and as not being detrimental to the interests of the
depositors of such banking company.]

5[(2) Where an application under 6[section 39 of the Companies

Act, 1956 (1 of 1956)], is made in respect of a banking company,
the High Court may direct the Reserve Bank to make an inquiry
in relation to the affairs of the banking company and the conduct
of its Directors and when such direction is given, the Reserve
Bank shall make such inquiry and submit its report to the
HighCourt.]

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7 [45. Power of Reserve Bank to apply to Central Government for
suspension of business by a banking company and to prepare
scheme of reconstitution of amalgamation.-

(1) Notwithstanding anything contained in the foregoing

provisions of this Part or in any other law or 8 [any agreement or
other instrument], for the time being in force, where it appears to
the Reserve Bank that there is good reason so to do, the Reserve
Bank may apply to the Central Government for an order of
moratorium in respect of 9[a banking company].
The Central Government, after considering the application
made by the Reserve Bank under sub-section (1), may make an
order of moratorium staying the commencement or
continuance of all actions and proceedings against the company
for a fixed period of time on such terms and conditions as it
thinks fit and proper and may from time to time extend the
period so however that the total period of moratorium shall not
exceed six months.

(2) Except as otherwise provided by any directions given by the

Central Government in the order made by it under sub-section (2)
or at any time thereafter the banking company shall not during
the period of moratorium make any payment to any depositors or
discharge any liabilities or obligations to any other creditors.

1[(4) During the period of moratorium, if the Reserve Bank

is satisfied that- (a)in the public interest; or

(b) in the interests of the depositors; or

(c) in order to secure the proper management of the banking

company; or

(d) in the interests of the banking system of the country as a

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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 company with any

other banking institution (in this section referred to as "the
transferee bank").

(5) The scheme aforesaid may contain provisions for all or any of
the following matters, namely:-

(a) the constitution, name and registered office, the capital,

assets, powers, rights, interests, authorities and privileges, the
liabilities, duties and obligations of the banking company on its
reconstruction or as the case may be, of the transferee bank;

(b) in the case of amalgamation of the banking company, the

transfer to the transferee bank of the business, properties,
assets and liabilities of the banking company on such terms
and conditions as may be specified in the scheme;
any change in the Board of Directors, or the appointment of a
new Board of Directors, of the banking company on its
reconstruction or, as the case may be, of the transferee bank
and the authority of whom, the manner in which, and the other
terms and conditions on which, such change or appointment
shall be made and in the case of appointment of a new Board of
Directors or of any Director the period for which such
appointment shall bemade;

(c) the alteration of the memorandum and articles of

association of the banking company on its reconstruction or, as
the case may be, of the transferee bank for the purpose of
altering the capital thereof or for such other purposes as may
be necessary to give effect to the reconstruction or

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amalgamation;

(d) subject to the provisions of the scheme, the continuation by

or against the banking company on its reconstruction or, as the
case may be, the transferee bank, of any actions or proceedings
pending against the banking company immediately before the
date of the order of moratorium;

(e) the reduction of the interest or rights which the members,

depositors and other creditors have in or against the banking
company before its reconstruction or amalgamation to such
extent as the Reserve Bank considers necessary in the public
interest or in the interest of the members, depositors and other
creditors or for the maintenance of the business of the banking
company;

(f) the payment in cash or otherwise to depositors and other

creditors in full satisfaction of their claim-

(i) in respect of their interest or rights in or against the

banking company before its reconstruction or
amalgamation; or

(ii) where their interest or rights aforesaid in or against the

banking company has or have been reduced under clause
(f), in respect of such interest or rights as so reduced;

(g) the allotment to the members of the banking company for

shares held by them therein before its reconstruction or
amalgamation whether their interest in such shares has been
reduced under clause (f) or not, of shares in the banking
company on its reconstruction or, as the case may be, in the
transferee bank and where any members claim payment in
cash and not allotment of shares, or where it is not possible to
allot shares to any members, the payment in cash to those
members in full satisfaction of their claim-
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(i) in respect of their interest in shares in the banking
company before its reconstruction or amalgamation; or

(ii) where such interest has been reduced under clause (f)
in respect of their interest in shares as so reduced;

(h) the continuance of the services of all the employees of the

banking company(excepting such of them as not being
workmen within the meaning of the Industrial Disputes Act,
1947 (14 of 1947), are specifically mentioned in the scheme) in
the banking company itself on its reconstruction or, as the case
maybe, in the transferee bank at the same remuneration and
on the same terms and conditions of service, which they were
getting, or as the case may be, by which they were being
governed, immediately before the date of the order of
moratorium:

PROVIDED that the scheme shall contain a provision that-

(i) the banking company shall pay or grant not later than
the expiry of the period of three years from the date on
which the scheme is sanctioned by the Central
Government, to the said employees the same
remuneration and the same terms and conditions of
service 1 [as are, at the time of such payment or grant,
applicable] to employees of corresponding rank or status
of a comparable banking company to be determined for
this purpose by the Reserve Bank(whose determination
in this respect shall be final);

(ii) the transferee bank shall pay or grant not later than
the expiry of the aforesaid period of three years, to the
said employees the same remuneration and the same
terms and conditions of service 2 [as are, at the time of
such payment or grant, applicable] to the other
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employees corresponding rank or status of the
transferee bank subject to the qualifications and
experience of the said employees being the same as or
equivalent to those of such other employees of the
transferee bank:

PROVIDED FURTHER that if in any case under clause (ii) of the

first proviso any doubt or difference as to whether the
qualification and experience of any of the said employees are
the same as or equivalent to the qualifications and experience
of the other employees of corresponding rank or status of the
transferee bank 1 [the doubt or difference shall be referred,
before the expiry of a period of three years from the date of the
payment or grant mentioned in that clause,] to the Reserve
Bank whose decision thereon shall be final;

(i) notwithstanding anything contained in clause (i) where any

of the employees of the banking company not being workmen
within the meaning of the Industrial Disputes Act, 1947 (14 of
1947), are specifically mentioned in the scheme under
clause(i) or where any employees of the banking company
have by notice in writing given to the banking company, or, as
the case may be, the transferee bank at any time before the
expiry of the one month next following the date on which the
scheme is sanctioned by the Central Government, intimated
their intention of not becoming employees of the banking
company on its reconstruction or, as the case may be, of the
transferee bank, the payment to such employees of
compensation, if any, to which they are entitled under the
Industrial Disputes Act, 1947, and such pension, gratuity,
provident fund and other retirement benefits ordinarily
admissible to them under the rules or authorisations of the
banking company immediately before the date of the order of
moratorium;

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(j) any other terms and conditions for the reconstruction or
amalgamation of the banking company;

(k) such incidental, consequential and supplemental matters as

are necessary to secure that the reconstruction or
amalgamation shall be fully and effectively carried out.

(6)(a) 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.

(b) The Reserve Bank may make such modifications, if any, in the
draft scheme as it may consider necessary in the light of the
suggestions and objections received from the banking company
and also from the transferee bank, and any other banking
company concerned in the amalgamation and from any members,
depositors or other creditors of each of those companies and the
transferee bank.
(7) The scheme shall thereafter be placed before the Central
Government for its sanction and the Central Government may
sanction the scheme without any modifications or with such
modifications as it may consider necessary, and the scheme as
sanctioned by the Central Government shall come into force on
such date as the Central Government may specify in this behalf:

PROVIDED that different dates may be specified for different

provisions of the scheme.

1 [(7A) The sanction accorded by the Central Government under

sub-section (7), whether before or after the commencement of
section 21 of the Banking Laws (Miscellaneous Provisions) Act,
1963 (55 of1963) shall be conclusive evidence that all that
requirements of this section relating to reconstruction, or, as the
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case may be, amalgamation have been complied with and a copy
of the sanctioned scheme certified in writing by an officer of the
Central Government to be a true copy thereof, shall, in all legal
proceedings (whether in appeal or otherwise and whether
instituted before or after the commencement of the said section
21), be admitted as evidence to the same extent as the original
scheme.]

(8) On and from the date of the coming into operation of the
scheme or any provision thereof, the scheme or such provision
shall be binding on the banking company, or, as the case may be,
on the transferee bank and any other banking company concerned
in the amalgamation and also on all the members, depositors and
other creditors and employees of each of those companies and of
the transferee bank, and on any other person having any right or
liability in relation to any of those companies or the transferee
bank 2 [including the trustees or other persons Managing, or
connected in any other manner with, any provident fund or other
fund maintained by any of those companies or the transferee
bank].

3 [(9) On and from the date of the coming into operation or, or
as the case maybe, the date specified in this behalf in, the
scheme], the properties and assets of the banking company
shall, by virtue of and to the extent provided in the scheme,
stand transferred to, and vest in, and the liabilities of the
banking company shall, by virtue of and to the extent provided
in the scheme, stand transferred to, and become the liabilities
of the transferee bank.
(10) If any difficulty arises in giving effect to the provisions of the
scheme, the Central Government may by order do anything not
inconsistent with such provisions which appears to it necessary or
expedient for the purpose of removing thedifficulty.

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(11) Copies of the scheme or of any order made under sub-section
(10) shall be laid before both Houses of Parliament, as soon as
may be, after the scheme has been sanctioned by the Central
Government, or, as the case may be, the order has beenmade.

(12) Where the scheme is a scheme for amalgamation of the

banking company, any business acquired by the transferee bank
under the scheme or under any provision thereof shall, after the
coming into operation of the scheme or such provision, be carried
on by the transferee bank in accordance with the law governing
the transferee bank, subject to such modifications in that law or
such exemptions of the transferee bank from the operation of any
provisions there of as the Central Government on the
recommendation of the Reserve Bank may, by notification in the
Official Gazette, make for the purpose of giving full effect to the
scheme:

PROVIDED that no such modification or exemption shall be

made so as to have effect for a period of more than seven years
from the date of the acquisition of such business.

(13) Nothing in this section shall be deemed to prevent the

amalgamation with a banking institution by a single scheme of
several banking companies in respect of each of which an order of
moratorium has been made under this section.

(14) The provisions of this section and of any scheme made under
it shall have effect notwithstanding anything to the contrary
contained in any other provisions of this Act or in any other law or
any agreement, award or other instrument for the time being in
force.

(15) In this section, "banking institution" means any banking

company and includes the Stale Bank of India or 1 [a subsidiary
bank or a corresponding new bank].
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1 [Explanation.-References in this section of the terms and
conditions of service as applicable to an employee shall not be
construed as extending tothe rank and status of such employee.]

 SPECIAL PROVISIONS FOR SPEEDY DISPOSAL OF WINDING

UP PROCEEDINGS

45A. Part III A to override other laws

The provisions of this Part and the rules made thereunder shall
have effect notwithstanding anything inconsistent therewith
contained in the 3 [Companies Act, 1956 (1 of 1956)] or the Code
of Civil Procedure, 1908 (5 of 1908), or the
4 [Code of Criminal Procedure, 1973 (2 of 1974) or any other law
for the time being in force or any Instrument having effect by
virtue of any such law; but the provisions of any such law or
Instrument Insofar as the same are not varied by,or inconsistent
with, the provisions of this Part or rules made there under shall
apply to all proceedings under this Part.

45B. Power of High Court to decide all claims in respect of banking

companies

The High Court shall, save as otherwise expressly PROVIDED in

section 45C, have exclusive jurisdiction to entertain and decide
any claim made by or against a banking company which is being
wound up (including claims by or against any of its branches in
India) or any application made under 5 [section 391 of the
Companies Act, 1956 (1 of 1956)] by or in respect of a banking
company or any question of priorities or any other question
whatsoever, whether of law or fad, which may relate to or arise in
the course of the winding up of a banking company, whether such
claim or question has arisen or arises or such application has been
made or is made before or after the date of the order for the
winding up of the banking company or before or after the

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commencement of the Banking Companies (Amendment) Act,
1953 (52 of1953).

45C. Transfer of pending proceedings

(1) Where a winding up order is made or has been made in respect
of a banking company, no suit or other legal proceeding, whether
civil or criminal, in respect of which the High Court has
jurisdiction under this Act and which is pending in any other court
immediately before the commencement of the Banking Companies
(Amendment) Act, 1953 (52 of1953), or the date of the order for
the winding up of the banking company, whichever is later, shall
be proceeded with except in the manner here in after provided.

(2) The official liquidator shall, within three months from the date
of the winding up order or the commencement of the Banking
Companies (Amendment) Act, 1953 (52 of 1953), whichever is
later, or such further time as the High Court may allow, submit to
the High Court a report containing a list of all such pending
proceedings together with particulars thereof.

(3) On receipt of a report under sub-section (2), the High Court

may, if it so thinks fit, give the parties concerned an opportunity to
show cause why the proceedings should not be transferred to
itself and after making an inquiry in such manner as may be
provided by rules made under section 45U, it shall make such
order as it deems fit transferring to itself all or such of the pending
proceedings as may be specified in the order and such
proceedings shall thereafter be disposed of by the High Court.

(4) If any proceedings pending in a court is not so transferred to

the High Court under sub-section (3), such proceeding shall be
continued in the court in which the proceeding was pending.

(5) Nothing in this section shall apply to any proceeding pending

in appeal before the Supreme Court or a High Court.

45D. Settlement of list of debtors

(1) Notwithstanding anything to the contrary contained in any law

for the time being in force, the High Court may settle in the
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manner hereinafter PROVIDED a list of debtors of a banking
company which is being wound up.

(2) Subject to any rules that may be made under section 52, the
official liquidator shall, within six months from the date of the
winding up order or the commencement of the Banking
Companies (Amendment) Act, 1953 (52 of 1953), whichever is
later, from time to time, file to the High Court lists of debtors
containing such particulars as are specified in the Fourth
Schedule:

PROVIDED that such lists may, with the leave of the High
Court, be filed after the expiry of the said period of six
months.
(3) On receipt of any list under sub-section (2), the High Court
shall, wherever necessary, cause notices to be issued on all
persons affected and after making an inquiry in such manner as
may be provided by rules made under section 45U, it shall make
an order settling the list ofdebtors:

PROVIDED that nothing in this section shall debar the High

Court from settling any such list in part as against such of the
persons whose debts have been settled without settling the
debts of all the persons placed on the list.

(4) At the time of the settlement of any such list, the High Court
shall pass an order for the payment of the amount due by each
debtor and make such further orders as may be necessary in
respect of the relief claimed, including reliefs against any
guarantor or in respect of the realisation of any security.

(5) Every such order shall, subject to the provisions for appeal, be
final and binding for all purposes as between the banking
company on the one hand and the person against whom the order
is passed all persons claiming through or under him on the other
hand, and shall be deemed to be a decree in asuit.

(6) In respect of every such order, the High Court shall issue a
certificate specifying clearly the reliefs granted and the names and
descriptions of the parties against whom such reliefs have been
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granted, the amount of costs awarded and by whom, and out of
what funds and in what proportions, such costs are to be paid; and
every such certificate shall be deemed to be a certified copy of the
decree for all purposes including execution.

(7) At the time of settling the list of debtors or at any other time
prior or subsequent thereto, the High Court shall have power to
pass any order in respect of a debtor on the application of the
official liquidator for the realisation, management, protection,
preservation or sale of any property given as security to the
banking company and to give such powers to the official
liquidator to carry out the aforesaid directions as the High Court
thinks fit.

(8) The High Court shall have power to sanction a compromise in

respect of any debt and to order the payment of any debt by
installments.

(9) In any case in which any such list is settled ex parte as against
any person, such person may, within thirty days from the date of
the order settling the list, apply to the High Court for an order to
vary such list, so far as it concerns him, and if the High Court is
satisfied that he was prevented by any sufficient cause from
appearing on the date fixed for the settlement of such list and that
he has a good defence to the claim of the banking company on
merits, the High Court may vary the list and pass such orders in
relation thereto as it thinks fit:
PROVIDED that the High Court may, if it so thinks fit,
entertain the application after the expiry of the said period
of thirty days.

(10) Nothing in this section shall—

(a) apply to a debt which has been secured by a mortgage of

immovable property, if a third party has any interest in such
immovable property; or

(b) prejudice the rights of the official liquidator to recover any

debt due to a banking company under any other law for the

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time being in force.

45E. Special provisions to make calls on contributories

Notwithstanding that the list of the contributories has not been

settled under
1 [section 467 of the Companies Act, 1956 (1 of 1956)], the High
Court may, if it appears to it necessary or expedient so to do, at
any time after making a winding up order, make a call on and
order payment thereof by any contributory under sub-section (1)
of 2 [section 470 of the Companies Act, 1956 (1 of 1956)], if such
contributory has been placed on the list of contributories by the
official liquidator and has not appeared to dispute his liability.

45F. Documents of banking company to be evidence

(1) Entries in the books of account or other documents of a

banking company which is being wound up shall be admitted in
evidence in all 3 [legal proceedings]; and all such entries may be
proved either by the production of the books of account or other
documents of the banking company containing such entries or by
the production of a copy of the entries, certified by the official
liquidator under his signature and stating that it is a true copy of
the original entries and that such original entries are contained in
the books of account or other documents of the banking company
in his possession.
Notwithstanding anything to the contrary contained in the
Indian Evidence Act, 1872 (1 of 1872), all such entries in the
books of account or other documents of a banking company
shall, as against the Directors, 4 [officers and other employees]
of the banking company in respect of which the winding up
order has been made 1[***], by prima facie evidence of the
truth of all matters purporting to be therein recorded.

45G. Public examination of Directors and auditors

(1) Where an order has been made for the winding up of a banking
company, the official liquidator shall submit a report whether in
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his opinion any loss has been caused to the banking company
since its formation by any act or omission (whether or not a fraud
has been committed by such act or omission) of any person in the
promotion or formation of the banking company or of any
Director or auditor of the banking company.

(2) If, on consideration of the report submitted under sub-

section(1), the High Court is of opinion that any person who has
taken part in the promotion or formation of the banking company
or has been a Director or an auditor of the banking company
should be publicly examined, it should hold a public sitting on a
date to be appointed for that purpose and direct that such person,
Director or auditor shall attend there at and shall be publicly
examined as to the promotion or formation or the conduct of the
business of the banking company, or as to his conduct and
dealings, Insofar as they relate to the affairs of the banking
company:

PROVIDED that no such person shall be publicly examined

unless he has been given an opportunity to show cause why
he should not be so examined.

(3) The official liquidator shall take part in the examination and for
that purpose may, if specially authorized by the High Court in that
behalf, employ such legal assistance as may be sanctioned by the
High Court.

(4) Any creditor or contributory may also take part in the

examination either personally or by any person entitled to appear
before the High Court.

(5) The High Court may put such questions to the person examined
as it thinks fit.

(6) The person examined shall be examined on oath and shall

answer all such questions as the High Court may put or allow to
be put to him.

(7) A person ordered to be examined under this section may, at his

own cost, employ any person entitled to appear before the High
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Court who shall be at liberty to put to him such questions as the
High Court may deem just for the purpose of enabling him to
explain or qualify any answer given by him:
PROVIDED that if he is, in the opinion of the High Court,
exculpated from any charges made or suggested against him,
the High Court may allow him such costs in its discretion as it
may deem fit.

(8) Notes of the examination shall be taken down in writing, and

shall be read over to or by, and signed by, the person examined
and may thereafter be used in evidence against him in any
proceeding, civil or criminal, and shall be open to the Inspection of
any creditor or contributory at all reasonable limes.

(9) Where on such examination, the High Court, is of opinion

(whether a fraud has been committed or not)—

(a) that a person, who has been a Director of the banking

company, is not fit to be a Director of a company, or

(b) that a person, who has been an auditor of the banking

company or a partner of a firm acting as such auditor, is not fit
to act as an auditor of a company or to be a partner of a firm
acting as such auditor, the High Court may make an order that
person shall not, without the leave of the High Court, be a
Director of, or in any way, whether directly or indirectly, be
concerned or take part in the management of an company or,
as the case may be, act as an auditor of, or be a partner of firm
acting as auditors of any company for such period not
exceeding five years as may be specified in the order.

45H. Special provisions for assessing damages against delinquent

Directors, etc

(1) Where an application is made to the High Court under 1

[section 543 of the Companies Act, 1956(1 of 1956)], against any
promoter, Director, manager, liquidator or officer of a banking
company for repayment or restoration of any money or property
and the applicant makes out a prima facie case against such
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person, the High Court shall make an order against such person to
repay and restore the money or property unless he proves that he
is not liable to make the repayment or restoration either wholly or
in part:

PROVIDED that where such an order is made jointly against

two or more such persons, they shall be jointly and severally
liable to make the repayment or restoration of the money or
property.
Where an application is made, to the High Court under 2[section
543 of the Companies Act, 1956 (I of 1956)], and the High Court
has reason to believe that a property belongs to any promoter,
Director, manager, liquidator or officer of the banking company,
whether the property stands in the name of such person or any
other person at an ostensible owner, then the High Court may, at
any time, whether before or after making an order under sub-
section (1), direct the attachment of such property, or such
portion thereof, as it thinks fit and the property so attached shall
remain subject to attachment unless the ostensible owner can
prove to the satisfaction of the High Court that he is the real
owner and the provisions of the Code of Civil Procedure, 1908 (5
of 1908), relating to attachment of property shall, as far as may be,
apply to suchattachment.

45I. Duty of Directors and officers of banking company to assist in

the realisation or property

Every Director or other officer of a banking company which is

being wound up shall give such assistance to the official liquidator
as he may reasonably require in connection with the realisation
and distribution of the property of the banking company.

45J. Special provisions for punishing offences in relation to

banking companies being wound up

(1) The High Court may, if it thinks fit, take cognizance of and try in
a summary way and offence alleged to have been committed by
any person who has taken part in the promotion or formation of
the banking company which is being wound , up or by any
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Director, manager or officer thereof:

PROVIDED that the offence is one punished under this Act or

under the
1[Companies Act, 1956(1 of 1956)].

(2) When trying any such offence as aforesaid, the High Court may
also try any other offence not referred to in sub-section (1) which
is an offence with which the accused may, under the 2 [Code of
Criminal Procedure, 1973 (2 of 1974)], be charged at the same
trial.

(3) In any case tried summarily under sub-section (1), the High
Court-

(a) need not summon any witness, if it is satisfied that the

evidence of such witness will not be material;

(b) shall not be bound to adjourn a trial for any purpose unless
such adjournment is, in the opinion of the High Court,
necessary in the interests of justice;
(c) shall, before passing any sentence, record judgment
embodying the substance of the evidence and also the
particulars specified in section 263 of the 1 [Code of Criminal
Procedure, 1973 (2 of 1974)], so far as that section may be
applicable, and nothing contained in sub-section (2) of section
262 of the2[Code of Criminal Procedure, 1973 (2 of 1974)],
shall apply to any such trial.

(4) All offences in relation to winding up alleged to have been

committed by any person specified in sub-section (1) which are
punishable under this Act or under the 3 [Companies Act, 1956(1
of 1956)], and which are not tried in a summary way under ' sub-
section (1) shall, notwithstanding anything to the contrary in that
Act or the 4 [Code of Criminal Procedure, 1973 (2 of 1974)], or in
any other law for the time being in force, be taken cognizance of
and tried by a Judge of the High Court other than the Judge for the
time being dealing with the proceedings for the winding up of the
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banking company.

(5) Notwithstanding anything to the contrary contained in the 5

[Code of Criminal Procedure, 1973 (2 of 1974)], the High Court
may take cognizance of any offence under this section, without the
accused being committed to it for trial 6[***].

45K. Power of High court to enforce schemes of arrangements, etc

[Rep. by the Banking Companies (Amendment) Act, 1959, (w.e.f. 1-

10-1959).]

45L. Public examination of Directors and auditors, etc., in

respect of a banking company under schemes of arrangement
(1) Where an application for sanction a compromise or
arrangement in respect of a banking company is made under
7[section 391 of the Companies Act, 1956 (1 of 1956)], or where
such sanction has been given and the High Court is of opinion,
whether on a report of the Reserve Bank or otherwise, that any
person who has taken part in the promotion or formation of the
banking company or has been a Director or auditor of the banking
company should be publicly examined, it may direct such
examination of such person and the provisions of section 45G
shall, as far as may be, apply to the banking company as they
apply to a banking company which is being wound up. Where a
compromise or arrangement is sanctioned under 1 [section 391 of
the Companies Act, 1956 (1 of 1956)], in respect of a banking
company, the provisions of 2 [section 543 of the said Act] and of
section 45H of this Act shall, as far as may be, apply to the banking
company as they apply to a banking company which is being
wound up as if the order sanctioning the compromise or
arrangement were an order for the winding up of the banking
company.

3 [(3) Where 4 [a scheme of reconstruction or amalgamation of a

banking company] has been sanctioned by the Central
Government under section 45 and the Central Government is of
opinion that any person who has taken part in the promotion or
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formation of the banking company or has been a Director or
auditor of the banking company should be publicly examined, that
Government may apply to the High Court for the examination of
such person and if on such examination the High Court finds
(whether a fraud has been committed or not) that that person is
not fit to be a Director of a company or to act as an auditor of a
company or to be a partner of a firm acting as such auditors, the
Central Government shall make an order that that person shall
not, without the leave of the Central Government, be a Director of,
or in any way, whether directly or indirectly, be concerned or take
part in the management of any company or, as the case may be,
act as an auditor of, or be a partner of a firm acting as auditors of,
any company for such period not exceeding five years as may be
specified in the order.

(4) Where 5 [a scheme of reconstruction or amalgamation of a

banking company] has been sanctioned by the Central
Government under section 45, the provisions of section 543 of the
Companies Act, 1956 (1 of 1956), and of section 45H of this Act
shall, as far as may be, apply to the banking company as they
apply to a banking company which is being wound up as if the
order sanctioning the scheme of reconstruction or amalgamation,
as the case may be, were an order for the winding up of the
banking company; and any reference in the said section543 to the
application of the official liquidator shall be construed as a
reference to the application of the Central Government.]

45M. Special provisions for banking companies working

under schemes of arrangement at the commencement of
the Amendment Act
Where any compromise or arrangement sanctioned in respect of a
banking company under 6[section 391 of the Companies Act,
1956 (1 of 1956)] is being worked at the commencement of the
Banking Companies (Amendment) Act, 1953 (52 of 1953) the
High Court may, if it so thinks fit, on the application of such
banking company,-

(a) excuse any delay in carrying out any of the provisions of the

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compromise or arrangement; or

(b) allow the banking company to settle the list of its debtors in
accordance with the provisions of section 45D and in such a
case, the provisions of the said section shall, as far as may be,
apply to the banking company as they apply to a banking
company which is being wound up as if the order sanctioning
the compromise or arrangement were an order for the winding
up of the banking company.

45N. Appeals

(1) An Appeal shall lie from any order or decision of the High Court
in a civil proceeding under this Act when the amount or value of
the subject-matter of the claim exceeds five thousand rupees.

(2) The High Court may by rules provide for an appeal against any
order made under section 45J and the conditions subject to which
any such appeal would lie.

(3) Subject to the provisions of sub-section (1) and sub-section (2

)and notwithstanding anything contained in any other law for the
time being in force, every order or decision of the High Court shall
be final and binding for all purposes as between the banking
company on the one hand, and all persons who are parties thereto
and all persons claiming through or under them or any of them, on
the other hand.

45O. Special period of limitation

(1) Notwithstanding anything to the contrary contained in the

Indian Limitation Act, 1908 (9 of 1908)1 or in any other law for
the time being in force, in computing the period of limitation
prescribed for a suit or application by a banking company which is
being wound up, the period commencing from the date of the
presentation of the petition for the winding up of the banking
company shall be excluded.
Notwithstanding anything to the contrary contained in the Indian
Limitation Act, 1908 (9 of 1908) or 2 [section 543 of the
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Companies Act, 1956(1 of 1956)] or in any other law for the time
being in force, there shall be no period of limitation for the
recovery of arrears of calls from any Director of a banking
company which is being wound up or for the enforcement by the
banking company against any of its Directors of any claim based
on a contract, express or implied; and in respect of all other claims
by the banking company against its Directors, the period of
limitation shall be twelve years from the date of the accrual of
such claims 1 [or five years from the date of the first appointment
of the liquidator, whichever is longer].

(2) The provisions of this section, Insofar as they relate to banking

companies being wound up, shall also apply to a banking company
in respect of which a petition for the winding up has been
presented before the commencement of the Banking Companies
(Amendment) Act, 1953 (52 of1953).

45P. Reserve Bank to tender advice in winding up proceeding

Where in any proceeding for the winding up of a banking

company in which any person other than the Reserve Bank has
been appointed as the official liquidator and the High Court has
directed the official liquidator to obtain the advice of the Reserve
Bank on any matter (which it is hereby empowered to do), it shall
be lawful for the Reserve Bank to examine the record of any such
proceeding and tender such advice on the matter as it may think
fit.

45Q. Power to Inspect

(1) The Reserve Bank shall, on being directed so to do by the

Central Government or by the High Court, cause an Inspection to
be made by one or more of its officers of a banking company
which is being wound up and its books and accounts.

(2) On such Inspection, the Reserve Bank shall submit its report
to the Central Government and the High Court.
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(3) If the Central Government, on consideration of the report of
the Reserve Bank, is of opinion that there has been a substantial
irregularity in the winding up proceedings, it may bring such
irregularity to the notice of the High Court for such action as the
High Court may think fit.
On receipt of the report of the Reserve Bank under sub-section (2)
or on any irregularity being brought to its notice by the Central
Government under sub- section(3),the High Court may, if it deems
fit, after giving notice to and hearing the Central Government in
regard to the report, give such directions as it may consider
necessary.

45R. Power to call for returns and information

The Reserve Bank may, at any time by a notice in writing, require

the liquidator of a banking company to furnish it, within such time
as may be specified in the notice or such further time as the
Reserve Bank may allow, any statement or information relating to
or connected with the winding up of the banking company; and it
shall be the duty of every liquidator to comply with such
requirements.

Explanation.—For the purposes of this section and section 45Q,

a banking company working under a compromise or
arrangement but prohibited from receiving fresh deposits,
shall, as far as may be, deemed to be banking company which is
being wound up.

45S. Chief Presidency Magistrate and District Magistrate to assist

official liquidator in taking charge of property of banking
company being wound up

(1) For the purpose of enabling the official liquidator or the

special officer appointed under sub-section (3) of section 37 to
take into his custody or underhis control, all property, effects and
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actionable claims to which a banking company 1 [***] is or
appears to be entitled, the official liquidator or the special officer,
as the case maybe, may request in writing the 2 [Chief
Metropolitan Magistrate or the Chief Judicial Magistrate], within
whose jurisdiction any property, books of accounts or other
documents of such banking company may be situate or be found,
to take possession thereof, and the 3 [Chief Metropolitan
Magistrate or the Chief Judicial Magistrate], as the case may be,
shall, on such request being made to him,-

4 [(a)take possession of such property, books of accounts or

other documents, and

(c) forward them to the official liquidator or the special officer.]

[(2) Where any such property and effects are in the possession of
the 2 [Chief Metropolitan Magistrate or the Chief Judicial
Magistrate], as the case may be, such Magistrate shall, on request
in writing being made to him by the official liquidator or the
special officer referred to in sub-section (1), sell such property
and effects and forward the net proceeds of the sole to the official
liquidator or the specialofficer:

PROVIDED that such sale shall, as far as practicable, be effected

by public auction.

(3) For the purpose of securing compliance with the provisions of

sub-section (1), the 3 [Chief Metropolitan Magistrate or the Chief
Judicial Magistrate] may take or cause to be taken such steps and
use of cause to be used such fore as may, in his opinion, be
necessary.

(4) No act of the 4 [Chief Metropolitan Magistrate or the Chief

Judicial Magistrate] done in pursuance of this section shall be
called in question in any court or before any authority.]
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45T. Enforcement of orders and decisions of High Court

(1) All orders made in any civil proceeding by a High Court may be
enforced in the same manner in which decrees of such court made
in any suit pending therein may been forced.

(2) Notwithstanding anything to the contrary contained in the

Code of Civil Procedure, 1908(5 of 1908), a liquidator may apply
for the execution of a decree by a court, other than the one which
made it on production of a certificate granted under subsection
(6) of section 45D and on his certifying to such other court in
writing the amount remaining due or relief remaining unenforced
under the decree.
Without prejudice to the provisions of sub-section (1) or sub-
section (2), any amount found due to the banking company by an
order or decision of the High Court, may, with the leave of the
High Court, be recovered 5[by the liquidator in the same manner
as an arrear of land revenue and for the purpose of such recovery
the liquidator may forward to the Collector within whose
jurisdiction the property of the person against whom any order or
decision of the High Court has been made is situate, a certificate
under his signature specifying the amount so due and the person
by whom it is payable].

1 [(4) On receipt of a certificate under sub-section (3), the

Collector shall proceed to recover from such person the amount
specified therein as if it were an arrear of land revenue:

PROVIDED that without prejudice to any other powers of the

Collector, he shall, for the purposes of recovering the said
amount, have all the powers which, under the Code of Civil
Procedure, 1908(5 of 1908), a civil court has for the purpose of
the recovery of an amount due under a decree.]

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45U. Power of High Court to make rules

The High Court may make rules consistent with this Act and the rules
made under section 52 prescribing—

(a) the manner in which inquiries and proceedings under Part

III or Part IIIA may beheld;

(b) the offences which may be tried summarily;

(c) the authority to which, and the conditions subject to which,

appeals may be preferred and the manner in which such
appeals may be filed and heard;

(d) any other matter for which provision has to be made for
enabling the High Court to effectively exercise its functions
under this Act.

45V. References to Directors, etc., shall be construed as including

references to past Directors, etc

For the removal of doubts it is hereby declared that any reference in this
Part to a Director, manager, liquidator, officer or auditor of a banking
company shall be construed as including a reference to any past or
present Director, manager, liquidator, officer or auditor of the banking
company.

45W. Part II not to apply to banking companies being wound up

Nothing contained in Part II shall apply to a banking company
which is being wound up.

45X. Validation of certain proceedings

Notwithstanding anything contained in section 45B or any other

provision of this Part or in section 11 of the Banking Companies
(Amendment) Act, 1950 (20 of 1950), no proceeding held,
judgment delivered or decree or order made before the
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commencement of the Banking Companies (Amendment) Act,
1953 (52 of 1953), by any court other than the High Court in
respect of any matter over which the High Court has jurisdiction
under this Act shall be invalid or be deemed ever to have been
invalid merely by reason of the fact that such proceeding,
judgment, decree or order was held, delivered or made by a court
other than the High Court.]

 SOCIAL BANKING IN INDIA

 CONCEPT OF SOCIALBANKING

Thetraditionalself-centered,profit-
orientedcommercialbankingconceptis fadingandamodemsocio-
economicroleisemergingasaresultofarevolutionof
expectationsofthesocietyontheroleandresponsibilitiesofbusinesscomm
unity
asawhole.Acommercialbankcannomorebeconsideredastrictlyeconomic
institutiontradinginmoney.’the‘socialcontrol’overbanksimposedforthefi
rst
timein1967hasevolvedintothephilosophyof‘socialbanking’.Abankisnow
expected to meet the growing needs of not merely the rich and urban
class of
people,theorganizedindustrialandcommercialventuresandpeoplewhoh
ave
soundsecuritytooffer,butalsotocatertothevarioustypesofneedsof‘masse
s’, most of whom live below the poverty line. It is also expected to
sponsor innovativenon-
bankingsocialwelfareschemestoimprovethequalityoflifeof the society as
awhole.
In short, there is a shitt from traditional concept of class banking’
tothe
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modemconceptofmassbanklng.Bankshavetoactasacatalystof‘economic
growth with social justice’ banks is expected to make a direct rather
than an
indirectattackoftheproblemofpovertyandtoeradicatethevarioussocialill
s afflicting thesociety.

Thedevelopmentoftheconceptof‘socialbanking’isanaturalcorollar
yof the development of the concept of ‘social responsibilities’ of other
types of businesses. The societal demands on business houses to
assume a social role justifies a similar demand on the banking
industryalso.

Businessdoesnotoperateinavacuum.Itencompassmallsectionsofth
e
society.Itisnotdistinctandseparatefromit‘ratheritispartofit’.Itisasmucha
partofthesocietyasahumanbeingisandintoday’sinteractivesystem,‘busin
ess cannot escape from society and society cannot exist without
business’ 1. The changing public needs and expectations affect a
business a good deal. Many decisions taken by a business have quite
often effective impact — whether beneficialordeleterious-
evenontheunconnectedmembersofthesociety.

Inviewofthiscloseinteractionbetweenbusinessandsociety,theform
er cannot function viewing the fulfillment of its predetermined
objectives as its sole mission.
Itowescertainobligationstothedifferentsegmentsofthesociety.Social
responsibilitiesofbusinessgenerallydenotetheanswerablenessofbusines
s’to
thesocietyforperformanceto"certainfunctionsorabstinencefromindulgi
ngin certainactivities.

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The concept of social responsibility is sometimes equated with ethical

normsgoverningbusinessandsociety.Itimpliesthatabusinesscannotpursu
eits profit policy unmindful of the society’s interest. ‘A business
concerncan and should have a conscience. The language of ethics does
have a place in the vocabulary of an organisation’2.

Someexpertsholdtheviewthatpaymentoffairwage,bonus,provision
of various frlnge benefits to employees, price discrimination to
consumers, by charging low rate to some of them on account of their
low purchasing power,
takingconcernoverthebuyersofproductandservicesintheformofimteado
f
‘letthebuyerbeware’approachto‘customereducative’approachareallsoci
al obligation ofbusiness.

However, these are all part of the fulfillment of social obligation,

lt
becomesamandatoryonetothebusinessconcernbytheestablishmentofva
rious legislations like payment of wages act, minimum wages act,
consumer protection act etc. Hence it becomes a legal obligation and a
buslness cannot ignore this obligation statutorily. In other words, an
act to be characterized as a socially
responsibleactmustnotbeonewhichabusinessconcernisalreadyunderale
gal
obligationtoperform.However,wheremorebenefitispaidthanthebareleg
al requirements, it will continue to constitute socialobligation.

Someotherauthorsviewsocialobligationasnotarisingoutofanyethical
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considerationswhicharediscretionaryinnature.Theyfeelthatadutyiscaston
a
businesstolookbeyonditsnoseandwelfareofasocietyinwhichitbreathermu
st find a place in its organizational frame work. Eventhough shareholders
arethe
ownersofbUslnessandtheyhavecontributedthenecessarycapital,thebusin
ess organisation ceases to be a private aftair for making profit. ‘Industry
in the twentiethcenturycannolongerberegarded
asaprivatearrangementforenriching
theshareholders.Ithasbecomeajointenterpriseinwhichworkers,managem
ent consumers, Government and the society also play a part’.

Itisalsorecognizedthatabusinesscorporationcannotaffordtoridero
ugh- shod over the society’s interest any longer. To improve its
corporate image it should consider society’s interest as legitimate as its
own c1x›sen goals. Business
canwinpublictrustonlyifitrecognizesthatothersocialinterestsareaslegiti
mate and proper as its own and it takes account of the broader public
interest in reaching its owndecisions4.

Yet another view emphasizes the need for identifying the societal
reactions so that lt can harmonize its own goals with the needs of the
society. The
corporationisnotandcannotbeapurelyeconomicinstitution.Itmustchang
eas
societychanges.Inthefinalanalysis,thecorporationmustalwaysactfromsignal
s that society sends to indicate its needs andexpectations.

Itmustbeunderstoodthattheneedforrecognizingsociety’sinterestd
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oes
notspringfromanyattitudeot’benevolenceorfromethicalconsideration.Itaris
es
outoftheimpactitsdecisionscastonthesociety.Theobligationthatabusines
s owes to society is, therefore not discretionary depending upon its
profit performance but an imperative necessity. Business organizations
take actions that intentionally or unintentionally, affect the institutions.
The concept of social
responsibilityarisesoutofrecognitionofsuchunintended,widerangingeffe
cts5.

Bankingbeingasubsystemofthebusinesssystemandanintegratedpart of
the overall social system, could not escape from being influenced by the
‘revolutionofexpectations’andtheresultant‘revolutionofchanges’initssupr
a
systemwhichultimatelyledtothecurrentlypopularconceptofcorporate soci
al responsibilities.

DEVELOPMENT OF SOCIAL BANKINGCONCEPT

Thethoughtsontheroleandresponsibilitiesofbanksvis-a-
visthesociety are presented here in a historical perspective leading to
ae current state of
thinkingabouton‘idealbank’.Theconceptofbankingbehaviorismodeledhe
re
onthebasisofthreetheoriesofcorporatebehaviournamely(1)thetradition
alor classical theory (2) the modern or managerial theory and (3) the
social responsiveness or social environmenttheory.

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The Classical Theory

The classical model relates to the period before industrial revolution.

Then,
thesoleresponsibilitiesofabusinessweretoassumeitseconomictaskefficiently
.
Itwasnotappropriateinfactitwasconsideredirresponsibleforthebusiness
to
takeonsocialtaskthatbelongtotakeninsocialtasksthatbelongtootherunits
of thesociety.

Thebankingsystemunderthemodelwasnotorganizedasitisto-
day.The
bankwassubjecttolittlestateregulations.Bankingwasnothingbutusurytra
ding inmoney.Thebankerswereself-
centered,profitmaximisingeconomiccitizens.
Theycouldoperateinmagnificentisolationoftherestofthesociety,exploitin
g
theexternalenvironmentasif’itwerethereforthetaking.Thewholesocialgroup
s
belongedtothem;theydldnotbelongtothem,theresponsibilityofabankwas
‘to
makeasmuchmoneyaspossible,whileconfirmingthebasicrulesofthesocie
ty;
boththoseembodiedinlawandthoseembodiedinethicalcustom.Thus,inth
e classicalview,theroleofabankerasitwasthatofanyotherbusinessman
was strictly economic in nature, subject to certain ethicalcompliance.

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The Modern Theory

The thoughts of new-classical economists like Neil Chamberlain,

John
MeymardKeynesandJohnRobinsonandofmanagementtheoristslikePeter
F Drucker, Keith Davis and George FSteiner have contributed to the
transformation
oftheclassicalvlewtomodemview.Thissocialobligationconceptimpliesth
at thebusinessdoesnotbelong
toownersonly,whoaretobetreatedasaspecial
kindofcreditors.Thebusinessowestoitsexistenceandgrowthtothegoodwi
llof
thevarioussocialgroupsnamelylabourers,creditors,consurs,communitya
nd societyatlarge.Therefore,itshouldactasthe‘trusteeofthesociety’.

BanksbeingthemainFulcruminthewheelofinfrastructurehaveagre
ater
responsibilitytoassumeextraeconomicrole.Theyareexpectedtoactas‘cha
nge
agents’and‘catalyst’ofprogress.Alltheirdirectclientsshouldbetreatedfairl
y.
Theirlendingpolicieshavetobetunedtotheprioritiessetbythegovernment.
In
short,thebankingprinciplesandpracticesshouldundergoasseachange,ne
ver imagined before, structurally, physically, qualitatively and
conceptually. The
socialcontroloverbanksintroducedin1967andthebanknationalizationin
1969
weretheimportantstepsinthedirectionofmakingthebankingsectorrealize
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their socialobligations.

Inasense,underthisconcept,theroleandresponsibilitiesofbanksare
well
definedandregulatedbylegislationsandadministrativecontrolsinordertoens
ure social accountability of banks. Banks in this way are not mere
economic institution but are socio-economic citizens governed by
patriotism, ethical values and economicexpediency.

Social Environmental Theory

NeilJacobyandPrakashS.Sethihaveadvocatedthemcialenvironmen
tor social responsiveness model of corporatebehaviour.
Themodemtheoryadvocates‘socialobligations’whichimpliesa‘reactive
’
roleuponpressurefromvarioussocialgroups.JacobyandSethifeelthatinth
e present business envlronment the role of business should further extend
to assume a‘proactive’role.Thisimpliesthatbusinessshould
assumeextraeconomic,extra-
legal,‘societal’rolevoluntaiily.Businessshouldperceivewhatshouldbeitslong-
runroleinadynamicsocialsystem.Businessbehaviourshouldbeguidedbyt
he
philosophy“whatisgoodforthesocietyisgoodforthecorporation”,‘quality
of life’ of the people in the society becomes the main concern of the
corporate polices.

Banks being pivotal institutions in an economy can not and

should not restrict themselves to their ‘business’ only. Traditional

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principles of lending should not be scrupulosity followed. A societal
approach both with respect to deposit mobilizatlon and advancing of
loans should be adopted. The weaker
sections,theprioritysectorindustriesandallthosewhocannotontheirownc
ome intobankingfoldshould
beassistedinallpossibleways.Thisapproachmeans
shedding‘selling’orientationtoadoptmarketingphilosophy.Thebankssoci
al involvement can have no limits except the humanitarian propensities
of their management.

Thedimensionofbankbehaviourdescribedaboveisnottobeconsider
ed as strictly watertight and mutually exclusive models. The role and
responsibilities
ofabankmayencompasstheeconomic,legal,ethicalprinciplesandthechang
ing ‘societal expectations’ aswell.

‘Socialresponsibilityistheobligationofdecisionmakerstotakeactions
whichprotectandimprovethewelfareofasocietyasawholealong withtheir
own interest. It builds better quality of life, thus harmonizing
organizational actions with society’s wants’. To put the social
responsibility philosophyinto action every one in business must try to
make decisions that will be for the common good of all societal members.

KumaraRaj.A6inhlsStudyon‘SocialObligation’ofBanksstatesthat
socialobligationofbusinessreferstotheoverridingconcernthatabusinessshou
ld
haveforthepluralistsocietyinitspursuitofactivitiesforprofit,involvingso
me sacrifice of profit with intent to benefit the society, thisimplim

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i. Profit earning, thtiugh fundamental to the functioning of a
business, does not in itself constitute socialobligation.
ii. Concernforothersisaessentialingredientofsocialobligation.
iii. Thereshouldbesomesacrificeofprofit,theprofitlostbenefitingso
me
societalgroupsotherthantheownersofthebusiness.Thesacrifice
of profit may take in the formof:
a. Taking up non traditional ventures exposed to grave risks
withintent
to benefit the society
b. Meeting well above the minimum requirements of law, with
the viewtoconferringgreaterbenefitsonvarioussocialgroups.
c. Effecting price cuts, improving the quality of its products
performance,withoutbeingunderalegalobligationtodoso.

Loss of certain profit is inevitable in the process of discharging

social obligation. That a business has no moral right to jeopardize the
interest of the
societyisborneoutofthesimplelogicthatoneman’sgainmustnotbeanother
man’sloss.Hence,theconcernthatabusinessshouldhaveforthesocietyisar
eal social obligation. The concern can be in the formof:

i. Helpingtheeconomically weaker sections of the society or the

neglected but vital sectors of theeconomy.
ii. Sacrifice of profit benefiting the society or thenation.
iii. Riskisundertakenbyventuringintonontraditionallinesofbusiness.
iv. Riskproneventuretakesupon
isintendedtosolveanysocialornational problem.
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v. Activitiesintruewithnationalprioritiessothatitcontributestothe
strengthening of”the natlonal economy.

DEVELOPMENT OF SOCIAL BANKING ININDIA

EversinceIndiaembarkedonitsquestofeconomicdevelopment,ithas
soughtsocialbettermentofthelessprlVileged.Socialcontentofgrowthhasb
een
gainingmomentumandthedeprivedhaveawakenedtotheirrightsandclai
ms.
Theadoptionofsocialisticideologybythecountryhasgivenrisetochangeon
the public attitude towards banks and in the expectations of the public
regarding services which the bank could render to the community
atlarge.

With the growing social awareness of the role of bank credit in

the
economy,itwasfeltthattheprevailingcommercialbankslendinghadlittleso
cial content and it facilitated concentration of economic power. In 1967,
it was observed that the credit requirements of organized sectors of the
economyand
largescaleborrowersweregenerallymetbycommercialbanksandco-
operative institutions,butinstitutionalcreditfacilitieswerevirtuallynon-
existentsofaras
thesmallborrowersandtheweakersectionsofthecommunitywereconcern
ed. This was responsible for poverty of small borrowers and
encouragement of money-lenders.
Thebankingcommissionreportin1972hasalsoindicatedthattheban
king systemwashighlyurbanized.Banklngactivitieswereconcentrated

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inmajorcities.
Inbigcitiesitwasmainlythewellplacedtraders,businessmenandindustrial
ists who availed themselves most of the credit facilities. Ownership and
controlof thesebankswasinfewhandsthatwereexpandingtheoperations
fortheirown
benefit,mostofthefundswereinvestedinthebusinessinwhichdirectorsoft
he banks themselves had more interest. The industrialists used these
banks for achieving the commercial goal, maximization ofprofit.

Thecommercialbankingwashighlyelitistcateringprimarilytolargea
nd
mediumscaleindustryandwholesaletrade.Theagriculturalsectorwhichus
edto contribute 50 per cent of national income was virtually bypassed.

TheGadgilstudygroupobservedthattherewasaflowofresourcesfro
m the smaller to larger population centers and rural to urban centers.
The credit deposit ratio was poor in relatively backward rural areas
because lending
opportunitieswerebetterindevelopedareas.Bulkofthelendingofcommer
cial
bankswasdlrectedtobigindustriesbecauseitwaseasytolendwithsafetyan
d
lowadministrativecots.Thisresultedflowoffundsfromruraltourbanareas.

Loans and advances were hlghly security oriented and comparative

neglect
ofsocialpurposesofventuretinanced.Insimplewords,bankswerenotprop
erly equipped to assist the attainment of the basic socio — economic
objectives of economic growth with socialjustice.

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Establishment of State Bank of India

The historical perversities in banking development needed a remedy.

Itwas felt that banks operations should be in alignment with the
national policy and objectives. It necessitated the government to think in
providing adequate banking
facilitiesundertheumbrellaofstateownership,controlandmanagement.

The All India Rural Credit Survey Committee, strongly

recommended creation of one powerful, integrated, state sponsored,
state-partnered commercial
bankinginstitutionwithanel’t’ectivemachineryofbranchesspreadoverthewh
ole country.

OntherecommendationoftheruralcreditsurveycommitteeImperialBan
k
ofIndiawasnationalizedandrenamedStateBankofIndiain1955.Itwasthefi
rst
milestoneinthehistoryofsocialbankinginIndia.Itsmainmissionwastoexte
nd
bankingfacilitiesonlargescale,moreparticularlyinruralandsemiurbanare
as
whereothercommercialbankswereshytoenter.Thebankwasaskedtoopen
400
brancheswithinaperiodot”tiveyearsofitsinception,mainlyinruralandsem
i urban areas. It fulfilled its turget of opening 400 branches a little
ahead of the scheduled span of five years and played a leading role in
the promotion and
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financingofagricultureandsmallindustrieswiththeassistanceofco-
operative banks.

Participation of other Commercial Banks

Till1960’ssupplyofcredittoagriculturewasmetbyco-
operatives.Butit
wasnotinapositiontocatertheincreasingneedsofagriculturistsonaccount
of
intensiveagriculturaldevelopmentprogrammesintroduced.Therefore,a
multi agency approach was necessitated to tackle the potential demand
for rural credit. Various committees like Agricultural Finance Sub-
Committee, Rural Banking Enquiry Committee and all India Rural
Credit Survey Committee (1954) had
emphasizedthatcreditprovidebycommercialbanksinIndiatoagriculture
was negligible, but none had made any recommendation that commercial
banksshould enter the agricultural and rural sector in a largescale.

Itwasatthisstage,theentryofcommercialbankswithenormousresources
attheircommandandgrowingnetworkoftheirofficesindifferentpartsofth
e
country,intothefieldofagriculturalfinancingwasconsiderednotonlydesir
able butnecessary.

Social Control over Commercial Banks

Pointing that private sector banks credit was being used to the
objects
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whicharecontrarytothenationalpriorities,thereportoftheAllIndiaCongre
ss Committee’s four economists stated that private control of banks in a
planned
economywasananachronismwhichhadbeenanobstacletotheachievemen
tof planobjectives.

Butatthesametimetherewassomeargumentagainstnationalization
of commercial banks. So that the Government ultimately decided to
introduce in
December1967,aschemeof”socialcontroloverbanks,whichwaslatergiven
a legal frame work under the banking laws amendment Act1968.

The main purpose of social control was to make the commercial

banks
active participation in the natlonal endeavour directed towards the
social well being of the masses. The social control legislation envisaged

i. Theestablishmentofthenationalcreditcounciltoformulatenewcreditpol
icy
ii. Appointmentofnon—
industrialistbankershavingspecialknowledgeofthe
workingofbankingcompanyaschairmanofallbanksaswholetimeemployee
for a term not exceeding fiveyears.
iii. Appointment of not less than 51% of professionaldirectors.
iv. Prohibitiontograntloansoradvancesorguaranteestodirectorsorafirmi
n which he is interestedand
v. Establishmentofatraininginstituteathighestleveltoimprovethetechni
cal expertise of bankexecutives.

Thepurposeofsocialcontrolwastoachievethesocialendswithoutact

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ual take over of banks by thegovernment.
National Credit Council

To regulate and implement the scheme of social control, a high

level body at the all India level, called national credit council was set in
1968. The main
functionsofthecouncilwere(i)toassesthedemandforbankscreditfromvari
ous
sectors(ii)todetermineprioritiesforgrantofloanandadvancesinthelightof
the availability of resources (iii) To ensure increased credit flow to the
hither to neglected sectors such as agriculture and smallindustries.

National credit council constituted five study groups. The result

of the
studygroupisnotsatisfactorytotheachlevementofsocietalgoals.Itwasfeltt
hat
eventheschemeofsocialcontroloverbankscouldnotprovidespeedierjusti
ceto the included sectors of the economy. Hence, the Govemmem had to
resort to the
extremestepoftakingover14majorcommercialbankswithalltheiroffices.

Nationalization of Major Commercial Banks

In order to bring about rapid transtiirmation in the banking

system and to
servebettertheneedsofdevelopmentof“theeconomyinconformitywithna

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tional policy and objectives, that the ordinance of nationalimtion of 14
major commercial banks in India was promulgated in1969.

Atthetimeofbanknationalization,thethenprimeministerpointed
out‘an
institutionsuchasbanking,whichtowardsthelivesofmillions,hasnecessari
lyto be inspired by a large social purpose and has to sub serve national
priorities and objectives’. That is why there has been wide spread
demand that major bank should not only be socially controlled but
policyowned.

Themainobjectiveof"banknationalizationwas(i)expandingbankcreditto
prioritysector(ii)removedof’controlbyafew(iii)givingprofessionalismtoba
nk
management(iv)encouragementofnewclassofentrepreneurs(v)provision
of adequatetrainingandreasonabletermsofserviceforbankemployees.

The nationalization of the 14 banks were undertaken to

accelerate the achievement of the objective of social control. The
emphasis was shifted from
industrialandcommercialsectorstoagricultureandsmallindustriesaswell
as from urban to rural areas with a view to achieving the social
objectives of
economicdevelopment.Thebankswerecalledupontoplayadevelopmental
role and assist the government in the effective implantation of socio-
economic programmes aimed at mitlgating the economic suffering of the
downtrodden with country. Thus attainment ot" social banklng was the

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very purpose of bank nationalizations.

Thesocialbankingactivitiesofcommercialbankscanbeclassifiedinto
two broad groups namely (i) social banking operations fnmulated as
well as
implementedbytheconcernedcommercialbanksand(ii)ruraldevelopmen
tand
povertyalleviationprogrammesdesignedandsponsoredbythegovernmen
tand financed by commercialbanks.

Social Banking Formulated by Commercial Banks

Theactivitiesdesignedtopromotetheenlistmentofruralpoorhavebe
enin
theformof(i)nonlendingsocialactivitiesand(ii)sociallendingactivities.Th
e non lending activities of commercial banks can be of mobilization of
rural deposits, rural branch expansion, provision of non banking
activities to
developmentofruralpooretc.Thelendingoperationcanbeeitherformulate
dby commercial banks or structured by government and financed by
commercial banks.
Branch Expansion in Rural Areas

Thepresentnetworkofcommercialbanksistheresultofadeliberatep
olicy
ofbranchexpansionpursuedbypublicsectorbanksdurlngthepostnationalizati
on
period.DuringtheperiodfromJuly1969toJuly1979,21881newbranchoffic

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es
wereopened.Theaveragepopulationperbankofficedecreasedfrom65000
ason
thedateofnationalizationto1800asattheendo1’June1982.Thus,itisobviou
s that many un banked areas were benefited by the branch expansion
policy followed in the country after nationalization ofbanks.

Deposit Mobilization

Thepostnationalizationperiodhasshownasubstantial
riseintherateof deposit mobilization. The aggregate deposit in banks
increased because of several
factorslike(i)therewasagrowthofbankinghabitamongthepeople(ii)stron
g
financialpositionofbanksinspiredpublicconfidenceinthan;(iii)launching
of depositinsurance
schemegavesafetytodepositors;(iv)expansionofthebranches
and(v)incomeofthepeoplehasbeenrlsing.Thetotalbankdepositrecordeda
morethanthreefoldincreaseduringsevenyearperiodsincenationalization.

Advances to Agriculture

The nationalized commercial banks provide financial assistance

to
agricultureintwowaysnamely,directassistanceandundirectedassistance.
The indirect assistance is offered for financing marketing of agricultural
produce, distribution of fertilizers financing food grains procurement

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by the food
corporationofIndia,providingfinancetolanddevelopmentbankco-
operative marketingandprocuringsocieties,co-
operativesugarfactories,providingfundsto
primaryagriculturalcreditsocietiesandfarmersservicesocietiestoenablethe
mto
lendtotheirmembersetc.Thedirectassistancetoagriculturistswasgivento
their short term needs like irrigation, purchase of fertilizers and pesticides,
seedingand
oftenrelatedexpenses.Bankswereinitiallygivenatargetofextending15per
cent of the total advances as direct finance to agriculture, then it was
raised to 18 percent to be achieved by march 1990 by taking together
direct and indirect
advanceswiththeconditionthatindirectfinaledoesnotexceedonefourthof
the total agriculturaladvances.

Credit Deposit Ratio in Rural Areas

One of the objectives of bank natlonalizations has been to see that

bank creditisdeployedinruralandsemi-
urbanareasinanappropriatemanner.Inorder
toachievetheobjectivein1977,theRBIlaiddownapolicytothepublicsector
banksthattheruralandsemiurbanbranchesofbanksshouldsecurecreditde
posit
ratioofatleast60percentbytheendofMarch1979.Itistorestricttheflo»of
funds from rural to urban areas. It is an important credit planning
measure for
bringingaboutupliftmentoftheweakersectionsoftheruralcommunity.
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Priority Sector Lending

The concept of priorlty sector lending is mainly intended to

ensure that
assistancefromthebankingsystemflowsinanincreasingmeasuretothosesecto
rs of the economy which though accounting for a significant proportion
of the national product have not received adequate support of institutional
finance in the past. The flow of institutional finance to the priority
sector started after
nationalizationofbanks.Bankshavedrawnupschemestoextendcredittos
mall borrowersinsectorssuchasagriculture,smallscaleindustry,road
transport,retail trade and small business which traditionally had very
little share in the credit extended bybanks.

Takingintoaccounttheneedtoprovidebankcredittoweakersections
for
specificneeds,consumptioncreditforcertainlimithasbeenincludedinprio
rity
sectors.Housingloans(upto5lakhsperunit).Educationloanforhigherstudi
es
arealsoclassifiedasprioritysectoradvances.Theamountofoutstandingadvanc
es by the commercial banks increased from Rs. 4.41 crores in June 1969
to Rs. 1,07,200 crores in March 1999. In terms of percentage, advances
to priority
sectorsincreasedfromlittleover14percentinJune1969tomorethan40per
cent in March1999.

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Credit to WeakerSections

Withtheviewtoaugmentcreditflowtosmallandpoorfarmersandwea
ker
sectionsofthesociety,commercialbankswereadvisedbyRBItoprovideatle
ast
10percentoftheirnetbankcreditor25percentoftheirprioritysectoradvanc
es to weaker sections comprising small and marginal farmers,
landlesslabourers, tangent farmers, artisans, village and cottage
industries and to beneficiaries of various government rural development
programmes. The public sector bankshave achieved maximum share of
target at the end of March1999.

Lead Bank Scheme

Thenationalcreditcouncllappointedastudygrouponorganizationalfra
me work for the implementation of social objectives under the
chairmanship of D.D.Gadgil. The study group recommended the
adoption of area approach to
bankingdevelopmentinthecountry.Thestudygroupsuggestedthatthepub
lic
sectorbanksshouldbegivenspecificdistrictswhereintheyshouldbeaskedt
o bring about integrated development of banking facilities. On the basis
of the recommendationofGadgilstudygroupItBIpreterredthelead
bankschemein 1969 allotting 338 district in the country to public
sectorbanks.

Theleadbankwhichisallocatedaspecificdistrictissupposedtoplayth

142 | P a g e
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e
roleofconsortiumleaderofallthebankingandfinancialinstitutionsfunctio
ning
inthedistrict.Theleadbankintoactasaleaderinthespecificdistrictandithas
toobtaintheco-operationofalltheotherbanksinthearea.Ithastoco-
ordinate
the banking and financial activities of all them and be in overall charge of
the district so far as the financial requirements ot” the district concerned.

Village adoption scheme (VAS)

The village adoption scheme is an extension of intensive area

approach
adoptedbycommercialbanks.Themainobjectiveoftheschemeistodevelop
the villageeconomyinallitsaspectsinaphased
manner.Thefollowingaretheusual steps suggested for village adoption
scheme (i) selection of villages (ii) surveyof selected villages to assess
the potentials for development (iii) preparation of a phased action
programme (iv) identification of eligible borrowers and (v) formulation
of proposals for development of individual farms. While selecting
villager for such scheme, the following points are to beconsidered

Good potential for development

ii.
Noninsatiabilitytorecurrentcalamitiesduetodraughtsfloo
dsetc Easy accessibilityand

143 | P a g e
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iv. Willingness of farmers to adopt progressive methods
ofcultivation

Differential Rate of Interest Scheme

Thedifferentialrateot”interest(DRI)schemewaslaunchedin1972on
the recommendation of Dr. R.K. Hazari committee. Under DRI scheme,
each public sector commercial bank is required to lend at least one per
cent of its total advances to the economically backward people at a low
rate of four per cent per annum. At least two —third ot the loan under
this scheme are given to the people belonging to scheduled castes and
tribes. People with the annual income of Rs. 2000 per family in rural
areas and Rs. 3000 per family in urban areas are eligible to get
concessional loans under this scheme. The eligible borrowers can
borrowa composite loan upto Rs. 6500 under thescheme.

Formation of Specialized Service Centers

Afternationalization,bankshavetakenkeenefforttodevelopruralare
as. One of the methods is concentratlng particular area by providing
financialand
othersupportingservicestothatparticulaltargetedpeople.Variouscomme
rcial banks designed their offices to suit the requirements of specific
type of rural customers.

i. Agricultural DevelopmentBranches

Realizing the need for specialized setup for agricultural finance,

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many commercial banks have setup specialized agricultural branches. The
state bank of India commenced Agricultural Development Branches
(ADB). It is a unique organizational innovation it was designed to give
to the banks the backing of
technicalexpertiseandmobilitywiththehelpoffieldstaffandvehicularsupp
ort to agriculturaldevelopment.

ii. Gram Vikas Kendra (GVK)

BankofBarodastarted
GramVikasKendrai.e.centresforthedevelopment
ofvillagestofinanceandruralactivitiesandprovidethemotherserviceswhi
ch area needed for development. It function in co-ordination with
Panchayat Raj institution, government otTicials and business houses in
order to create employment opportunities in rural areas, reduce rural
poverty, increase irrigation facilities and farmoutput.

iii. Rural Service Centres(RSC)

RuralservicecentershavebeenopenedbyDenabanktoprovidetechn
ical guidance to the branches undertaking rural financing. A team of
qualified agricultural officers in posted to every Centres to give
technical support tothe

ruralbankbranches.Itsmainpurposesaretoenabletheruralbranchesunde
rthe
commandtodrawandmakeuseoftheservicesoftechnicalofficialsattheplac
e,
tokeeprapportwithgovernmentagenciesattheblocklevel,marketingagen
cies, suppliers of inputsetc.,

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Thus, the specialized service centres were formulated by the

banks to enabletherural
peopletotheireasyaccessintothebankandtoavailtechnical support of
thebanks.

Regional Rural Banks

In June 1975, the then Prime Minister announced a new economic

programme which, among many other things aimed at devising
alternative
agenciestoprovideinstitutionalcredittolenders,labouers,ruralartisansands
mall and marginal farmers, in the context of steps being instantiated
also under the
programme,toliquidateruralindebtednessofthoseclassesofpeople.

AworkinggroupbytheGovernmentofIndiaunderthechairmanshipo
f
M.Narashimhaexaminedthequestionindetailandrecommendedtosetupn
ew
ruralbanksassubsidiarypublicsectorbankstocatertothefinancialrequire
ments
ofruralpeople.TheworkinggrouprecommendedtosetupRegionalRuralBa
nks (RRB’s) which should be state sponsored, regionally based and
rural-oriented commercialbankcombiningthelocalfeelandfamiliarity
withruralproblems. Keeping in view the main objective of RRBsare.

i. Takingbankingservicestothedoorstepsofruralmassesparticularl
yin hitherto unbanked ruralareas.
146 | P a g e
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ii. Makingavailableinstitutionalcredittotheweakersectionsofthesocie
ty.
iii. Moblise rural savings and channelise them for supporting
productive activities in the ruralareas.

iv. To credit a supplementary channel for the flow of credit from

central money market to ruralareas.
v. Generatingemploymentopportunitiesinruralareasandbringingdo
wn
the cost of providing credit to rural areas.

The RRB is established by the central Government on the request

of
commercialbankswhichiscalledsponsorbankinastateorunionterritory.T
he central Government shall speclfy the local limits within which each
RRB will
operate.TheshareofcapitaloftheRRBissubscribedbytheCentralGovernm
ent, Sponsor Bank and respective State Government into ratio of
50:35:15 percent respectively. Thus after nationalization, RRBs, was
established with the objective
ofstrengtheningruralcreditstructureandextentbankingservicestoruralar
eas. From the above discussion, it is clear that social orientation of
commercial banking activates expanded in various forms after
nationalization of major commercial banks inIndia.

Implementation of Rural Development Programmes by Banks

Afterindependence,toachievesocio-

147 | P a g e
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economicobjectiveofournations, through various policies of" our
economic planning member of rural development
programmeswereinitiatedinourcountry.Someofthemarewageemploym
ent programmes and specific area development programmes which are
directly implemented by the central and state governments. Some
others are meant for providing self employment opportunities to poor
sections of the community through credit the assistance of commercial
banks along with subsidies and concessions of the Central and
StateGovernment.

The following paragraphs give a biief not on variom rural

development programmes of the government, implemented by their
own agencies.

Wage Employment Programmes

Jawahar Rozgar Yojana (JRY)

TheJawaharRozgarYojana(JRY)wasstatedinApril1989bymergingt
he on going National Rural Employment Programme (NREP) and Rural
landless employment Guarantee Programme (RLEG) into a single rural
employment programme. The main objective of JRY is generation of
additional gainful employment for the unemployed and under
employed persons both men and
womeninruralareas.Thesecondaryobjectiveot”theJRYiscreationofdurab
le community and social assets. It is designed to arrest the seasonality
of wage
employment.Italsoaimedatimprovementinthequalityoflifeoftheruralpo

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or
byprovidingsupplementarysourceofincomethroughwageemployment.

Employment Assurance Scheme (EAS)

It was introduced with effect from 2ndOctober 1993 in the rural

area of
1778blocksof261districts.Theblocksselectedwereinthedroughtpronear
eas, tribal areas and hill areas. During 1994-95 it was extended to 409
blocks. The main objective of the scheme is to provide gainful
employment during lean
agriculturalseasoninmanualworktoallablebodiedadultsinruralareas.

Jawahar Gram Samridhi Yojana (JGSY)

ThegovernmentrestrictedJRYandEmploymentAssuranceScheme(EAS
) and launched a new programme Jawahar Gram Samridhi Yojana
(JGSY) to develop rural infrastructure at the village level in a planned
manner. This programme has come to effect from 1stApril 1999. It is
implemented through
villagepanchayatandfundsareprovidedbyDRDAdirectlytovillagepanchayats.
22.5 per cent of funds of the programme have been earmarked for
individual beneficiary schemes of scheduled caste and tribes. The
DRDA/ZP isresponsible
for overall guidance supervision, monitoring and periodical reporting
ofthe
programme.

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Pradhan Mantri Gram Sadak Yojana(PMGSY)

The PMGSY was launched on December 25, 2000 as a fully

centrally sponsored scheme with the primary objective of providing all
weather
connectivelytotheunconnectedhabitationsintheruralareas.Theprogram
meis funded mainly from the accruals of diesel cess in the Central Road
Fund. In
addition,supportofthemultilateralfundingagenclesandthedomesticfinan
cial institutions
isbeingobtainedtomeetthetinancialrequirementsoftheprogramme.

Million Wells Schemes

It was launched as a sub-scheme of National Rural Employment

ProgrammeandRuralLandlessEmploymentGuaranteeProgramme(RLEG
P) during 1988-89. It continued as a sub-scheme of JRY from April 1989
to December 1995. From 1stJanuary 1996 MWS is an independent
scheme. The objective of the scheme is to provide open irrigation wells
free of cost topoor, small and marginal farmers who are below the
poverty like and freed bonded labourers. It is a centrally sponsored
scheme and funds are shared betweenthe central and state in
80:20basis.

Sampoorna Grameen Rozgar Yojana (SGRY)

This programme was launched on 25"’ September 2001 by merging

150 | P a g e
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theon-
goingschemesofRs.10,000croretoprovideadditionalwageemploymentin
the rural areas. The objectives ot” the programme are to provide
additional wage employment in the rural areas as also food security
along side the creation of durable community, social and economic
infrastructure in rural areas.Every
workers seeking employment under the scheme will be provided
minimum 5 kilograms of food grains per man-day as part of wages.

National Rural Employment Guarantee Scheme (NREGS)

The national rural employment guarantee Act aims at enhancing

the livelihood security of the people in rural areas by providing
guaranteed wage employment thoughworksthatdevelopthelivelihood
resourcebaseofthatareaso
thatinthatprocessofemploymentgenerationdurableassetsarebuildup.Th
eAct
wasexecutedinSeptember2005.Itwasnotifiedin200districtsof27stateso
n February2006andwasextendedto130additionaldistricts130additional
districts on2007-
08,AllremainingruralareashavebeennotifiedfromApril1,2008,adult
membersofruralhouseholdwhoarewillingtodounskilledmanualworkma
y apply for registration to the local gram Panchayat for getting the job
under the scheme.

Training of Rural Youth for Self Employment (TRYSEM)

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Itisacentrallysponsoredscheme,startedon15'hAugust1979.Itaimsa
t providing basic technical and entrepreneurial skill to the rural youth from
families below the poverty line to enable them to take up self
employment in thebroad
fieldsagricultureandalliedsectors,industries,servicesandbminessactiviti
es.

The rural youth in the age group of 18-35 years from families
below
povertylineareenlistedfortrainingunderthescheme.Thedurationoftraini
ng course is six month. However, the state level co-ordination committee
can change
thedurationfornewtrades.Thereisnoeducationalqualificationprescribed
for selection of trainees. The trainees are paid a stipend varying from
Rs.200 to
Rs.500permonthduringthetrainingbesidesthatthereisaprovisionofRs.80
0as an allowance for purchase of tool kits bytrainees.

Development of Women and Children in Rural Areas (DWCRA)

TheDWCRAwaslaunchedasasubschemeisIRDPduringtheyear1982
-
83in50districts.Itsubsequentlyexpandedtocoverallthedistrictsinthecou
ntry by 1994-95. The flow of crcdlt and other benefits to poor women
inspite of
reservationundervariousprogrammelikeIRDP,TRYSEMwerefoundtoben
ot
makingmuchimpact.Therefore,inordertoovercomethissituationandinvo
lve
152 | P a g e
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theruralwomenmoreintenselylneconomicactivities,aexchisiveprogrammefo
r women namely Development of women and children in Rural Areas
was introduced.

Supply of Improved Tools to Rural Artisans (SITRA)

Thisschemewaslaunchedasasub-
schemeofIRDPinJuly1992,withthe
objectiveofenablingtheruralartisanstoenhancethequalityoftheirproduct
s,
increasetheirproductionandincomeandensurebetterqualityoflifewithint
he use of migration to urbanareas.

Artisans from a variety of crafts except weaving, tailoring and

beedi workers are to supplied with suitable improved hand tools or set
of tools. The
averagecostofatoolkitisRs.2000,incaseofapowerdriventoolstheaverage
cost is Rs.4500/-. Ninety per cent of the cost of toolkit is a subsidy from
the
GovernmentofIndiaand10percentistobecontributedbythebeneficiary.

Other DevelopmentProgrammes

In addition to the above discussed wage employment programmes,

special development programmes like drought Prone Areas
Programme, (DPAP) Desert Development Programme (DDP), Rural
Housing Programmes like Indra Awaas
Yojana,NationalMissionforRuralHousing,andothersocialwelfareprogramme
, such as National Old Age Pension Scheme, National Family Benefit

153 | P a g e
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Scheme, National Maternity Benefit Scheme Provision of Urban Amenities
in RuralAreas

PURA) etc., have also been implemented by the Government through

various agencies for the development of rural poor households.

Self Employment Programmes

Besides the above described wage employment and area

development
programmes,therearesomeselfemploymentandentrepreneurialdevelop
ment
programmeshavealsobeendeslgnedbythegovernmentandimplementedthro
ugh various government agencies in association with commercial banks of
concerned
areasforfinancingtheprojects.Theimportantprogrammescentrallydesigneda
nd
processedbythestategovernmentauthoritiesfortheprovisionofcreditand
other supportive assistances by the commercial banks have been
narrated in the followingparagraphs.

Integrated Rural Development Program me (IRDP)

The strategy and policy of direct attack on poverty by way of

target
approachforruralpoorcomeintobeinginfourthfiveyearplanswiththemai
n objective of improving the assets base of the poor and to involve the
poor income generation process of the economy. The IRDP was
initiated initially in 2300

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blocksandhasbeenextendedtoalltheblocksofthecountrysince2‘dOctober
1980.

IRDP aims at providing income generating assets and self

employment opportunities for the rural poor. Assistance under the
scheme is given totarget
groupofruralpoorbelongingtofamiliesbelowpovertyliveintheformofsub
sidy by the Government and term credit by financialinstitutions.

Thetargetgroupconsistsofweakersectionsofthesocietywhoseperca
pita
monthlyexpendituredoesnotexceedthelimitofpovertylike.Withinthetarg
et group special safeguards have been provided by the reservation of
50 percent
benefit for SCs/STs; 40 per cent for women and 3 per cent physically
handicapped persons, priority also given to women headed households.

ItisimplementedbyDistrictRuralDevelopmentAgency.TheGovernmen
t BodyatthedistrictlevelprovidesguidanceanddirectionstoDRDAS.

ItincludeslocalmemberofParliament,memberofLegislativeAssemb
ly
andchairmanofZillaParishad,HeadsofdistrictDevelopmentDepartmenta
nd
representativeofSC/STwomen,NGOs.Atthegrassrootsleveltheprogramm
eis carried out by block development officer, with the help of village
level functionaries.

TheperformanceofIRDPismonitoredatstatelevelbyastatelevelco-
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ordination committee and it review the implementation of the scheme
and lay downpolicyguidelines.Atthecentrallevelahighlevelco-
ordinationcommittee on credit support to IRDP also monitor
itsoperations.

Swarnajayanthi Gram Swarozgar Yojana(SGSY)

TheSGSYhasbeenlaunchedwltheffectfrom1stApril1999asanewself
employment programme. With the introduction of SGSY programme, the
earlier
programmeofIRDP,TRYSEM,DWCRA,SITRA,MWSarewithdrawnfrom
operatlon.

TheobjectiveofSGSYistobringtheassistedpoorfamiliesabovepovert
y linebyprovidingthemincome-
generatingassetsthroughamixofbankcreditand
governmentsubsidy.Theprogrammeaimsatestablishing
alargenumberofmicro enterprises in rural areas based on the ability of
the poor and potential of each area.

 Salient Features

The salient features of the Swamjayanti Gram Swarozgar Yojana

are as follows:

Swamjayantl Gram Swarozgar Yojana aims at establishing alarge

number of micro-enterprises in the i ural areas, building upon the
potential of the rural

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poor.Itisrootedinthebelief’thatruralpoorinIndiahavecompetenceand,giv
en
therightsupportcanbesuccessfulproducersofvaluablegoodsandservices.

1. Theasslstedfamilies(knownasSwarozgaris)maybeindividualsorgr
oups (self-help groups). Emphasis is, however, on the
groupapproach.
2. The objective under SGSY is to brlng every assisted family above
the poverty line in threeyears.
3. Towards this end, Swarnjayanti Gram Swarozgar Yojana is
conceived asa
holistic programme of micro-enterprises covering all aspects of
self- employment, viz., organization of the rural poor into self-
help groups and
theircapacitybuilding,planningof’activityclusters,infrastructurebu
ildup, technology, credit andmarketing.

4. In establishing the micro-enterprises, the emphasis under SGSY is

on the cluster approach. Ftir this, 4-5 key activities are to be
identified in each block based on the resources, occupational
skills of the people and availability of markets. The key activities
are to be selected with the approval of the Panchayat Samitis at
the block level and the District Rural Development Agency
(DRDA) / Zila Parishad (ZP) at the District level. The major share
of SGSY assistance will be in activityclusters.
5. SGSYadoptsaprojectapproachforeachkeyactivity.Projectreportsaret
o
be prepared in respect of identified key activities for sanctioning
of loans and to ensure adequacy ot‘ financing.

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6. The existing infrastructure for the cluster of activities is
reviewedand
gapsidentified.CriticalgapsinlnvestmentsaremadeunderSGSYsubj
ect toaceilingof20percent(25percentinthecaseofnorth-
easternStates)of
thetotalprogrammesallocationforeachdistrict.Thisamountismaint
ained by the DRDA as SGSY - Infrastructure Fund’ and which can
also be utilised to generate additional funding from othersources.

7. The effort under SGSY is to cover 30 per cent of the pmr in each
block in next five years through an efficlentprogramme.
8. SGSY also focuses on the group approach. This involves
organization of thepoorintoself-helpgroupsandtheircapacity
building.Effortsaremade to involve women meiiibers in each self-
helpgroup.
9. The Gram Sabha authenticates the list of families below the
poverty line identified in the Below Poverty Line (BPL) census.
Identification of individual families suitable for each key activity
is made through a participatoryprocess.
10. SGSY is a credit-cum-subsidy programme. However, credit is the
critical
componentinSGSY,subsidybeingonlyaminorandenablingelement.
11. SGSY seeks to promote multiple credit rather than a one time
credit injection. The credit requirements of the Swarangaris are
carefully assessed. They are allowed and encouraged for
increasing their credit intake over theyears.
12. SGSY seeks to lay emphasis on skill development through well
designed training courses. Those who have been sanctioned loans

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are assessed and given necessarytraining.
13. SGSY ensures upgradation of the technology in the identified
activity clusters. The technology intervention seeks to add value
to the local resources, including processing of the locally
available for local and non- localmarket.
14. SGSY provides for promotion of marketing of the goods produced
bythe SGSY Swarozgarls. this involves provision of
marketintelligence,
development of markets, consultancy services, as well as
institutional arrangements for marketing of the goods including
exports.

15. SubsidyunderSGSYisuniformat30percentoftheprojectcost,subject
to a maximum of Rs. 7500. In respect of SCs/STs, however, these
are 50 per
centandRs.10,000respectively.ForgroupsofSwarozgaristhesubsid
y is at 50 per cent of the cost of the scheme, subject to a ceiling of
Rs. 1.25 lakh.
16. SGSY has a special tocus on the vulnerable groups among the
rural poor. Accordingly, the SCs/STs would account for at least
50 per cent of the Swarozgaris, women for 40 per cent and the
disabled for 3percent.
17. SGSY is implemented by the DRDAs through the Panchayat
Samitis.Theprocessofplanning,implementationandmonitoringinte
grates the banks and other financial institutions, the PRIs, NGOs,
as well as technical institutions in the district.
18. Fifteen percent of the funds under SGSY are set apart at the
national level

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forprojectsoffarreachingsignificanceandwhichcanalsoactasindicat
ors of possible alternative strategies to be taken up in
conjunction with the other departments or semi-government and
internationalorganizations.
19. FundsundertheSGSYaresharedbytheCentralandStateGovernment
sin the ratio of75:25.
20. The Central allocation earmarked for the States is distributed
in relation to the incidence of poverty in the States. However,
additional parameters like absorption capacity and special
requirements will also be taken into consideration during the
course of theyear.

SGSYhasalsoacomponentforspecialprojectsforself-
employmentofthe
ruralpoor.SomeprojectproposalssubmittedbytheStateGovernmentsare
under active consideration of theMinistry.

Prime Miuister's Rozgar Yojana (PMRY)

Prime Minister's Rozgar Yojana (PMRY) was launched on

2‘dOctober,
1993throughoutthecountrywithaviewtoprovidingemploymentto10Lak
hs
educatedunemployedyouthbysettingup7lakhmicroenterprises.ThePMR
Yis
anenlargedversionofSEEUY,beingimplementedwithhigherinvestmentli
mit

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ofprojectcostuptoRs.1lakhperperson,withoutinsistingoncollateralsecuri
ty forstartingaself-
employmentventureinindustry,serviceandbusinesssectors.
Thereisaspecialprovisionintheschemeallowingtwoormoreeligibleperso
nsto
jointogetherinpartnershipmmpromotinganenterprise.Insuchcases,thel
oan limitwillalsobecorrespondinglyincreasedtoRs.2lakhfortwopersons,
Rs.3
lakhfor3personsandsoon.Thebeneficiaryshouldcontribute5percentofth
e project cost as margin money. This loan is provided by the bank for
suitable
personsandforviableactivitiesonlyaftertheTaskForceCommitteeatthedis
trict level identifies and selects prospective self-employment persons and
recommends their cases for bankableprojects.

Assistance from the Government of India is in the form of an

outright
subsidyof15percentoftheprojectcostorRs.7,500,whicheverisless.Fortwo
are more persons promoting a venture, subsidy will be correspondingly
increased
atthisrate.Thisamountismadeintoafixeddepositandadjustedagainstthelo
an
amountattheendoftherepaymentperiod.Thebeneficiariesfortheschemea
re
counselledandscreenedbytheTaskForceatthelTlnndal/block/districtlevelfo
r recommending applications to hanks for sanction ofloans.

After sanction of loam by the banks, the beneficiaries have to

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undergo training for four weeks in entrepreneurship and get equipped
to organise and operate micro-enterprises.

APMRYbeneficiaryisonewhoisintheagegroupof18-35yearsatthe
timeofsubmissionofapplicationforloanandwhohaspassedorfailedatleast
matriculationandhaspassedITI,andhasundergonethegovernmentspons
ored
technicalcourseforaminimumdurationofsixmonths.Theannualincomeof
the family of such beneficiaries should not exceed Rs.24,000/- per annum.
Thefamily
forthispurposewouldincludethebeneficiaryandthespouse.Thefamilyinc
ome should include income from all sources, whether in the form of
wages, salary, pension, agricultural income, business income, rent and
or interest from any
source.Thecandidateshouldnotbeadefaultertoanynationalisedbank/financi
al institution / cooperative bank. The beneficiary should have been a
permanent resident of the area (district) for at least threeyears.

This scheme is implemented through the office of the

Development
Commissionersmallscaleindustries(SSI)atthecentrallevel,theDirectorat
eof
IndustriesattheStateLevel.andtheDistrictIndustriesCentresatthefieldlev
el. The banking division of RBI coordinates the banking support and the
nationalised banksprovidethenecessaryloans.Asfarastrainingisconcerned,
varioustraining institutions like SISIs are providing support and state
governments have made available training manuals, project profiles
etc. Training of the PMRY
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beneficiariesistheresponsibilityofthestategovernmentsandtheyhaveassi
gned SISIs, DICs and NGOs for thispurpose.

Bio Gas Development

Bio gas is a clean non-polluting and low cost fuel. The ministry of
non
conventionalenergysourceshastakenupaprogrammeknownasNationalProje
ct
onBiogasDevelopment(NPBD)forthedevelopmentandharnessingofbiog
as potentialinthecountry.Theproject wasstartedin1981-82
withthefollowing objectives:

a. To provide fuel cookingpurposes

b. To provide organic manure through bio gasplants
c. To mitigate drudgery oi’ ruralwomen
d. Toimprovesanitationinvillagesbylinkingtoiletswithbiogasplants

State governments have designated nodal departments and nodal

agencies for implementation of the project. Bio gas development and
training centres
functioninginmajorStates,providetechnicalandtrainingbackuptoconcer
ned state nodal departments. Commercial and co-operative banks
provide loan for setting up of bio gas plants. NPBD provides for
different types of financial incentives including central subsidy tousers

Self Employment Scheme for Ex-Servicemen (SEMPEX)

This scheme has been in operation since January 1988, it is

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designed to provide a comprehensive package of credit for encouraging
ex-servicemen, dlsabled service personnel, war windows and windows
of ex-servicemen to
undertakeagriculturalandalliedactivitiesortosetupnonfarmunitsinrural
areas to earn their livelihood for leading a dignifiedlife.

Many army personnel sustain serious injuries and are rendered

disabled for life. SEMFEX covers them in the furrow of financial
assistance for economic
activities.Thecoverageot’categoryofwomenissignificantinthecontextsof
march of women folk in India from dependence to independence.
SEMFEX recognizes the shift form welfare approach to empowerment
approach in the
developmentprocessofthecountry.Thecommercialbanks,regionalruralb
anks andco-
operativebanksaretheagenciesthroughwhichloanscanbeavailed.

Tamilnadu Adi Dravidar Housing Development Corporation

(TAHDCO)

TAHDCO has been established in order to improve the living

conditions of
scheduledcastes/scheduledtribesbyimprovingtheincomeearningcapaci
ties through income generating programmes and improving human
skills through
trainingprogrammes.Itsschemeshavebeendecentralizedandformulatesa
tthe
districtlevelfortheeconomicdevelopmentofSCandSTs.TheDistrictAction

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Plans (DAP) have categorized certain activities for the purpose of easy
monitoring. That includes and purchase, agricultural activities, allied
agricultural activities, mining and quarrying, manufacturing processing
and servicing,
construction,tradeandcommerce,transportandstorageandotherservices
.

TAHDCO acts as a State channelising agency in implementing the

national schemes of the ministry of’ social justice and empowerment of
our country.
TAHDCO’sfinancialassistanceismadeavailablethroughcommercialbanks
to
alltheeligiblepersons,thosearewillingtostartselfemploymentventures.
Thusinthischapter,theconceptofsocialbankinghasbeendefined
and
narratedbytheresearcher,takingintoaccountalltheaspectsassociatedwit
hthis
concept.Thedevelopmentot”socialbankinginIndiahasbeendescribedistw
o
formsknownasdevelopmentbeforenationalizationofmajorcommercialb
anks and development after nationalization ofbanks.

Thischapteralsohadadetaileddescriptiononthevoluntarysociallen
ding
servicesandtheGovernmentsponsoredsociallendingschemesimplement
edby commercial banks to the benefit of ruralcommunity.

# IMPORTANT QUESTIONS:-

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1. Who is a Banker ? Explain Types & General Relationship of Banker with
his customer.
2. Define Bank? Explain the functions, importance & Limitations of bank?
3. Write the detailed note on Suspension & winding up of Business of
banking companies.
4. Write the note on Management of Banking Companies.
5. Explain the Social control over banking, Banking.
6. Write the short note on following:-
(a) Account & audit
(b) Reconstruction and reorganization of banking companies

=========================================================

UNIT-II

NEGOTIABLE INSTRUMENT ACT,1881

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 INTRODUCTION

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its
enactment, the provision of the English Negotiable Instrument Act were
applicable in India, and the present Act is also based on the English Act with
certain modifications. It extends to the whole of India except the State of
Jammu and Kashmir. The Act operates subject to the provisions of Sections
31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve
Bank of India Act provides that no person in India other than the Bank or as
expressly authorised by this Act, the Central Government shall draw, accept,
make or issue any bill of exchange, hundi, promissory note or engagement
for the paymentof money payable to bearer on demand. This Section further
provides that no one except the RBI or the Central Government can make
or issue a promissory note expressed to be payable or demand or after a
certain time. Section 32 of the Reserve Bank of India Act makes issue of
such bills or notes punishable with fine which may extend to the amount of
the instrument. The effect or the consequences of these provisionsare:
1. A promissory note cannot be made payable to the bearer, no matter
whether it is payable on demand or after a certain time.
2. A bill of exchange cannot be made payable to the bearer on demand
though it can be made payable to the bearer after a certain time.
3. But a cheque {though a bill of exchange} payable to bearer or demand can
be drawn on a person’s account with a banker.

 MEANING OF NEGOTIABLEINSTRUMENTS

According to Section 13 (a) of the Act, “Negotiable instrument means a

promissory note, bill of exchange or cheque payable either to order or to
bearer, whether the word “order” or “ bearer” appear on the instrument
ornot.”

In the words of Justice, Willis, “A negotiable instrument is one, the

property in which is acquired by anyone who takes it bonafide and for value
not with standing any defects of the title in the person from whom he
tookit”.

Thus, the term, negotiable instrument means a written document which

creates a right in favour of some person and which is freely transferable.

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Although the Act mentions only these three instruments (such as a
promissory note, a bill of exchange and cheque), it does not exclude the
possibility of adding any other instrument which satisfies the following two
conditions of negotiability:

1. the instrument should be freely transferable (by delivery or by

endorsement. and delivery) by the custom of the trade; and
2. the person who obtains it in good faith and for value should get it free
from all defects, and be entitled to recover the money of the instrument in
his own name.

As such, documents like share warrants payable to bearer, debentures

payable to bearer and dividend warrants are negotiable instruments. But
the money orders and postal orders, deposit receipts, share certificates, bill
of lading, dock warrant, etc. are not negotiable instruments. Although they
are transferable by delivery and endorsements, yet they are not able to give
better title to the bonafide transferee for value than what the transfer or
has.

 CHARACTERISTICS OF A NEGOTIABLEINSTRUMENT

A negotiable instrument has the following characteristics:

1.Property: The prossessor of the negotiable instrument is presumed to be

the owner of the property contained therein. A negotiable instrument does
not merely give possession of the instrument but right to property also.
The property in a negotiable instrument can be transferred without any
formality. In the case of bearer instrument, the property passes by mere
delivery to the transferee. In the case of an order instrument, endorsement
and delivery are required for the transfer of property.

2.Title: The transferee of a negotiable instrument is known as ‘holder in

due course.’ A bonafide transferee for value is not affected by any defect of
title on the part of the transferor or of any of the previous holders of the
instrument.

3.Rights: The transferee of the negotiable instrument can sue in his own
name, in case of dishonour. A negotiable instrument can be transferred any

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number of times till it is at maturity. The holder of the instrument need not
give notice of transfer to the party liable on the instrument topay.

4.Presumptions: Certain presumptions apply to all negotiable instruments

e.g., a presumption that consideration has been paid under it. It is not
necessary to write in a promissory note the words ‘for value received’ or
similar expressions because the payment of consideration is presumed. The
words are usually included to create additional evidence of consideration.

5.Prompt payment: A negotiable instrument enables the holder to expect

prompt payment because a dishonour means the ruin of the credit of all
persons who are parties to the instrument.

 PRESUMPTIONS AS TO NEGOTIABLEINSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down certain
presumptions which the court presumes in regard to negotiable
instruments. In other words these presumptions need not be proved as they
are presumed to exist in every negotiable instrument. Until the contrary is
proved the following presumptions shall be made in case of all negotiable
instruments:

1.Consideration: It shall be presumed that every negotiable instrument

was made drawn, accepted or endorsed for consideration. It is presumed
that, consideration is present in every negotiable instrument until the
contrary is presumed. The presumption of consideration, however may be
rebutted by proof that the instrument had been obtained from, its lawful
owner by means of fraud or undue influence.

2.Date: Where a negotiable instrument is dated, the presumption is that it

has been made or drawn on such date, unless the contrary is proved.

3.Time of acceptance: Unless the contrary is proved, every accepted bill of

exchange is presumed to have been accepted within a reasonable time after
its issue and before its maturity. This presumption only applies when the
acceptance is not dated; if the acceptance bears a date, it will prima facie be
taken as evidence of the date on which it was made.

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4. Time of transfer: Unless the contrary is presumed it shall be presumed
that every transfer of a negotiable instrument was made before its maturity.

5. Order of endorsement: Until the contrary is proved it shall be presumed

that the endorsements appearing upon a negotiable instrument were made
in the order in which they appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost

promissory note, bill of exchange or cheque was duly stamped.

7. Holder in due course: Until the contrary is proved, it shall be presumed

that the holder of a negotiable instrument is the holder in due course. Every
holder of a negotiable instrument is presumed to have paid consideration
for it and to have taken it in good faith. But if the instrument was obtained
from its lawful owner by means of an offence or fraud, the holder has to
prove that he is a holder in due course.

8. Proof of protest: Section 119 lays down that in a suit upon an

instrument which has been dishonoured, the court shall on proof of the
protest, presume the fact of dishonour, unless and until such fact is
disproved.

 TYPES OF NEGOTIABLEINSTRUMENT

Section 13 of the Negotiable Instruments Act states that a negotiable

instrument is a promissory note, bill of exchange or a cheque payable either
to order or to bearer. Negotiable instruments recognised by statute are:
(i) Promissory notes
(ii) Bills of exchange
(iii) Cheques. Negotiable instruments recognised by usage or custom are:
(i) Hundis
(ii) Share warrants
(iii) Dividend warrants
(iv) Bankers draft
(v) Circular notes
(vi) Bearer debentures
(vii) Debentures of Bombay Port Trust

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(viii) Railway receipts
(ix) Delivery orders.

This list of negotiable instrument is not a closed chapter. With the growth of
commerce, new kinds of securities may claim recognition as negotiable
instruments. The courts in India usually follow the practice of English
courts in according the character of negotiability to other instruments.

1. Promissory notes

Section 4 of the Act defines, “A promissory note is an instrument in writing

(note being a bank-note or a currency note) containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money to or to
the order of a certain person, or to the bearer of the instruments.”

 Essential elements
An instrument to be a promissory note must possess the following
elements:

1.It must be in writing: A mere verbal promise to pay is not a promissory

note. The method of writing (either in ink or pencil or printing, etc.) is
unimportant, but it must be in any form that cannot be alteredeasily.

2.It must certainly an express promise or clear understanding to pay:

There must be an express undertaking to pay. A mere acknowledgment is
not enough. The following are not promissory notes as there is no promise
topay.
If A writes:
(a) “Mr. B, I.O.U. (I owe you) Rs.500”
(b) “I am liable to pay you Rs.500”.
(c) “I have taken from you Rs. 100, whenever you ask for it have to pay”.

The following will be taken as promissory notes because there is an

express promise to pay:
If A writes:
(a) “I promise to pay B or order Rs.500”
(b) “I acknowledge myself to be indebted to B in Rs. 1000 to be paid on
demand, for the value received”.

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(3) Promise to pay must be unconditional: A conditional undertaking
destroys the negotiable character of an otherwise negotiable instrument.
Therefore, the promise to pay must not depend upon the happening of
some outside contingency or event. It must be payable absolutely.
(4) It should be signed by the maker: The person who promise to pay
must sign the instrument even though it might have been written by the
promisor himself. There are no restrictions regarding the form or place of
signatures in the instrument. It may be in any part of the instrument. It may
be in pencil or ink, a thumb mark or initials. The pro note can be signed by
the authorised agent of the maker, but the agent must expressly state as to
on whose behalf he is signing, otherwise he himself may be held liable as a
maker. The only legal requirement is that it should indicate with certainty
the identity of the person and his intention to be bound by the terms of the
agreement.
(5) The maker must be certain: The note self must show clearly who is
the person agreeing to undertake the liability to pay the amount. In case a
person signs in an assumed name, he is liable as a maker because a maker is
taken as certain if from his description sufficient indication follows about
his identity. In case two or more persons promise to pay, they may bind
themselves jointly or jointly and severally, but their liability cannot be in
the alternative.
(6) The payee must be certain: The instrument must point out with
certainty the person to whom the promise has been made. The payee may
be ascertained by name or by designation. A note payable to the maker
himself is not pronate unless it is indorsed by him. In case, there is a
mistake in the name of the payee or his designation; the note is valid, if the
payee can be ascertained by evidence. Even where the name of a dead
person is entered as payee in ignorance of his death, his legal
representative can enforce payment.

(7) The promise should be to pay money and money only: Money
means legal tender money and not old and rare coins. A promise to deliver
paddy either in the alternative or in addition to money does not constitute a
promissory note.

(8) The amount should be certain: One of the important characteristics

of a promissory note is certainty—not only regarding the person to whom
or by whom payment is to be made but also regarding the amount.

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However, paragraph 3 of Section 5 provides that the sum does not become
indefinite merely because
(a) there is a promise to pay amount with interest at a specified rate.
(b) the amount is to be paid at an indicated rate of exchange.
(c) the amount is payable by installments with a condition that the whole
balance shall fall due for payment on a default being committed in the
payment of any one installment.

(9) Other formalities: The other formalities regarding number, place,

date, consideration etc. though usually found given in the promissory notes
but are not essential in law. The date of instrument is not material unless
the amount is made payable at a certain time after date. Even in such a case,
omission of date does not invalidate the instrument and the date of
execution can be independently ascertained and proved.

On demand (or six month after date) I promise to pay Peter or order the
sum of rupees one thousand with interest at 8 per cent per annum until
payment.

2. Bill of exchange
Section 5 of the Act defines, “A bill of exchange is an instrument in writing
containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of a certain
person or to the bearer of the instrument”.

A bill of exchange, therefore, is a written acknowledgement of the debt,

written by the creditor and accepted by the debtor. There are usually three
parties to a bill of exchange drawer, acceptor or drawee and payee. Drawer
himself may be the payee.

 Essential conditions of a bill of exchange

(1) It must be in writing.
(2) It must be signed by the drawer.
(3) The drawer, drawee and payee must be certain.
(4) The sum payable must also be certain.
(5) It should be properly stamped.
(6) It must contain an express order to pay money and money alone.

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For example, In the following cases, there is no order to pay, but only a
request to pay. Therefore, none can be considered as a bill of exchange:
(a) “I shall be highly obliged if you make it convenient to pay Rs. 1000 to
Suresh”.
(b) “Mr. Ramesh, please let the bearer have one thousand rupees, and
place it to my account and oblige”
However, there is an order to pay, though it is politely made, in the
following examples:
(a) “Please pay Rs. 500 to the order of‘A’.
(b) ‘Mr. A will oblige Mr. C, by paying to the order of’P”.

(7) The order must be unconditional.

 Distinction Between Bill of Exchange and Promissory Note

1. Number of parties: In a promissory note there are only two parties –

the maker (debtor) and the payee (creditor). In a bill of exchange, there are
three parties; drawer, drawee and payee; although any two out of the three
may be filled by one and the same person,

2. Payment to the maker: A promissory note cannot be made payable

the maker himself, while in a bill of exchange to the drawer and payee or
drawee and payee may be sameperson.

3. Unconditional promise: A promissory note contains an

unconditional promise by the maker to pay to the payee or his order,
whereas in a bill of exchange, there is an unconditional order to the drawee
to pay according to the direction of the drawer.
4. Prior acceptance: A note is presented for payment without any prior
acceptance by the maker. A bill of exchange is payable after sight must be
accepted by the drawee or someone else on his behalf, before it can be
presented for payment.

5. Primary or absolute liability: The liability of the maker of a

promissory note is primary and absolute, but the liability of the drawer of a
bill of exchange is secondary and conditional.

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6. Relation: The maker of the promissory note stands in immediate
relation with the payee, while the maker or drawer of an accepted bill
stands in immediate relations with the acceptor and not the payee.

7. Protest for dishonour: Foreign bill of exchange must be protested

for dishonour when such protest is required to be made by the law of the
country where they are drawn, but no such protest is needed in the case of
a promissory note.

8. Notice of dishonour: When a bill is dishonoured, due notice of

dishonour is to be given by the holder to the drawer and the intermediate
indorsers, but no such notice need be given in the case of a note.

 Classification of Bills

Bills can be classified as:

(1) Inland and foreign bills.
(2) Time and demand bills.
(3) Trade and accommodation bills.

(1) Inland and Foreign Bills

Inland bill: A bill is, named as an inland bill if:

(a) it is drawn in India on a person residing in India, whether payable in
or outside India,or
(b) it is drawn in India on a person residing outside India but payable
inIndia.

The following are the Inland bills

(i) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is
payable in Bombay. The bill is an inlandbill.
(ii) A bill is drawn by a Delhi merchant on a person in London, but is
made payable in India. This is an inland bill.
(iii) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is
accepted for payment in Japan. The bill is an inland bill.

Foreign Bill: A bill which is not an inland bill is a foreign bill. The following
are the foreign bills:

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1. A bill drawn outside India and made payable in India.
2. A bill drawn outside India on any person residing outside India.
3. A bill drawn in India on a person residing outside India and made
payable outside India.
4. A bill drawn outside India on a person residing in India.
5. A bill drawn outside India and made payable outside India.

Bills in sets (Secs. 132 and 133): The foreign bills are generally drawn in
sets of three, and each sets is termed as a ‘via’.

As soon as anyone of the set is paid, the others becomes inoperative. These
bills are drawn in different parts. They are drawn in order to avoid their
loss or miscarriage during transit. Each part is despatched separately. To
avoid delay, all the parts are sent on the same day; by different mode of
conveyance.

Rules: Sections 132 and 133 provide for the following rules:
(i) A bill of exchange may be drawn in parts, each part being numbered
and containing a provision that it shall continue payable only so long as the
others remain unpaid. All parts make one bill and the entire bill is
extinguished, i.e. when payment is made on one part- the other parts will
become inoperative (Section132).
(ii) The drawer should sign and deliver all the parts but the acceptance is
to be conveyed only on one of the parts. In case a person accepts or
endorses different parts of the bill in favour of different persons, he and
the subsequent endorsers of each part are liable on such part as if it were a
separate bill (Sec. 132).
(iii) As between holders in due course of the different parts of the same
bill, he who first acquired title to any one partis entitled to the other parts
and is also entitled to claim the money represented by bill (Sec. 133).

(2) Time and Demand Bill

Time bill: A bill payable after a fixed time is termed as a time bill.
In other words, bill payable “after date” is a time bill.

Demand bill: A bill payable at sight or on demand is termed as a demand

bill.

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(3) Trade and Accommodation Bill

Trade bill: A bill drawn and accepted for a genuine trade transaction is
termed as a “trade bill”.

Accommodation bill: A bill drawn and accepted not for a genuine trade
transaction but only to provide financial help to some party is termed as an
“accommodation bill”.

Example: A, is need of money for three months. He induces his friend B to

accept a bill of exchange drawn on him for Rs. 1,000 for three months. The
bill is drawn and accepted. The bill is an “accommodation bill”. A may get
the bill discounted from his bankers immediately, paying a small sum as
discount. Thus, he can use the funds for three months and then just before
maturity he may remit the money to B, who will meet the bill on maturity.

In the above example A is the “accommodated party” while B is the

“accommodating party”.
It is to be noted that an recommendation bill may be for accommodation of
both the drawer arid acceptor. In such a case, they share the proceeds of the
discounted bill.

 Rules regarding accommodation bills are:

(i) In case the patty accommodated continues to hold the bill till
maturity, the accommodating party shall not be liable to him for payment
of, the bill since the contract between them is not based on any
consideration (Section43).
(ii) But the accommodating party shall be liable to any subsequent holder
for value who may be knowing the exact position that the bill is an
accommodation bill and that the full consideration has not been received by
the acceptor. The accommodating party can, in turn, claim compensation
from the accommodated party for the amount it has been asked to pay the
holder forvalue.
(iii) An accommodation bill may be negotiated after maturity. The holder
or such a bill after maturity is in the same position as a holder before
maturity, provided he takes it in good faith and for value (Sec.59)

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In form and all other respects an accommodation bill is quite similar to an
ordinary bill of exchange. There is nothing on the face of the
accommodation bill to distinguish it from an ordinary trade bill.

3. Cheques

Section 6 of the Act defines “A cheque is a bill of exchange drawn on a

specified banker, and not expressed to be payable otherwise than on
demand”.
A cheque is bill of exchange with two more qualifications, namely,

(i) it is always drawn on a specified banker, and

(ii) it is always payable on demand. Consequently, all cheque are
bill of exchange, but all bills are not cheque. A cheque must
satisfy all the requirements of a bill of exchange; that is, it must
be signed by the drawer, and must contain an unconditional
order on a specified banker to pay a certain sum of money to or
to the order of a certain person or to the bearer of the cheque. It
does not require acceptance.

 Distinction Between Bills of Exchange and Cheque

1. A bill of exchange is usually drawn on some person or firm, while a

cheque is always drawn on a bank.

2. It is essential that a bill of exchange must be accepted before its payment

can be claimed A cheque does not require any suchacceptance.

3. A cheque can only be drawn payable on demand, a bill may be also drawn
payable on demand, or on the expiry of a certain period after date orsight.

4. A grace of three days is allowed in the case of time bills while no grace is
given in the case of a cheque.

5.The drawer of the bill is discharged from his liability, if it is not presented
for payment, but the drawer of a cheque is discharged only if he suffers any
damage by delay in presenting the cheque for payment.

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6.Notice of dishonour of a bill is necessary, but no such notice is necessary
in the case of cheque.

7. A cheque may be crossed, but not needed in the case ofbill.

8.A bill of exchange must be properly stamped, while a cheque does not
require any stamp.

9. A cheque drawn to bearer payable on demand shall be valid but a bill

payable on demand can never be drawn tobearer.

10.Unlike cheques, the payment of a bill cannot be countermanded by the

drawer.

4. Hundis

A “Hundi” is a negotiable instrument written in an oriental language. The

term hundi includes all indigenous negotiable instrument whether they be
in the form of notes orbills.

The word ‘hundi’ is said to be derived from the Sanskrit word ‘hundi’, which
means “to collect”. They are quite popular among the Indian merchants
from very old days. They are used to finance trade and commerce and
provide a fascile and sound medium of currency and credit.

Hundis are governed by the custom and usage of the locality in which they
are intended to be used and not by the provision of the Negotiable
Instruments Act. In case there is no customary rule known as to a certain
point, the court may apply the provisions of the Negotiable Instruments Act.
It is also open to the parties to expressly exclude the applicability of any
custom relating to hundis by agreement (lndur Chandra vs. Lachhmi Bibi, 7
B.I.R. 682).

 PARTIES TO NEGOTIABLEINSTRUMENTS

1 Parties to Bill of Exchange

1. Drawer: The maker of a bill of exchange is called the ‘drawer’.

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2. Drawee: The person directed to pay the money by the drawer is
called the‘drawee’,
3. Acceptor: After a drawee of a bill has signed his assent upon the bill,
or if there are more parts than one, upon one of such pares and delivered
the same, or given notice of such signing to the holder or to some person on
his behalf, he is called the ‘ acceptor’.
4. Payee: The person named in the instrument, to whom or to whose
order the money is directed to be paid by the instrument is called the
‘payee’. He is the real beneficiary under the instrument. Where he signs his
name and makes the instrument payable to some other person, that other
person does not become the payee.
5. Indorser: When the holder transfers or indorses the instrument to
anyone else, the holder becomes the‘indorser’.
6. Indorsee: The person to whom the bill is indorsed is called an
‘indorsee’.
7. Holder: A person who is legally entitled to the possession of the
negotiable instrument in his own name and to receive the amount thereof,
is called a ‘holder’. He is either the original payee, or the indorsee. In case
the bill is payable to the bearer, the person in possession of the negotiable
instrument is called the‘holder’.
8. Drawee in case of need: When in the bill or in any endorsement, the
name of any person is given, in addition to the drawee, to be resorted to in
case of need, such a person is called ‘drawee in case ofneed’.

In such a case it is obligatory on the part of the holder to present the bill to
such a drawee in case the original drawee refuses to accept the bill. The bill
is taken to be dishonoured by non-acceptance or for nonpayment, only
when such a drawee refuses to accept or pay the bill.
9. Acceptor for honour: In case the original drawee refuses to accept
the bill or to furnish better security when demanded by the notary, any
person who is not liable on the bill, may accept it with the consent of the
holder, for the honour of any party liable on the bill. Such an acceptor is
called ‘acceptor for honour’.

2. Parties to a Promissory Note

1. Maker. He is the person who promises to pay the amount stated in

the note. He is the debtor.

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2. Payee. He is the person to whom the amount is payable i.e.
thecreditor.
3. Holder. He is the payee or the person to whom the note might have
been indorsed.
4. The indorser and indorsee (the same as in the case of abill).

3. Parties to a Cheque

1. Drawer. He is the person who draws the cheque, i.e., the depositor of
money in thebank.
2. Drawee. It is the drawer’s banker on whom the cheque has been
drawn.
3. Payee. He is the person who is entitled to receive the payment of the
cheque.
4. The holder, indorser and indorsee (the same as in the case of a bill
or note).

 NEGOTIATION

Negotiation may be defined as the process by which a third party is

constituted the holder of the instrument so as to entitle him to the
possession of the same and to receive the amount due thereon in his own
name. According to section 14 of the Act, ‘when a promissory note, bill of
exchange or cheque is transferred to any person so as to constitute that
person the holder thereof, the instrument is said to be negotiated.’ The main
purpose and essence of negotiation is to make the transferee of a
promissory note, a bill of exchange or a cheque the holder thereof.

Negotiation thus requires two conditions to be fulfilled, namely:

1. There must be a transfer of the instrument to another person;and

2. The transfer must be made in such a manner as to constitute the
transferee the holder of the instrument.

Handing over a negotiable instrument to a servant for safe custody is not

negotiation; there must be a transfer with an intention to pass title

 Modes of negotiation

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Negotiation may be effected in the following two ways:
1. Negotiation by delivery (Sec. 47): Where a promissory note or a bill
of exchange or a cheque is payable to a bearer, it may be negotiated by
delivery thereof.
Example: A, the holder of a negotiable instrument payable to bearer,
delivers it to B’s agent to keep it for B. The instrument has been negotiated.
2. Negotiation by endorsement and delivery (Sec. 48): A promissory
note, a cheque or a bill of exchange payable to order can be negotiated only
be endorsement and delivery. Unless the holder signs his endorsement on
the instrument and delivers it, the transferee does not become a holder. If
there are more payees than one, all must endorse it.

 ASSIGNMENT

Bills, notes and cheques represent debts and as such have been held to be
assignable without endorsement. Transfer by assignment takes place
when the holder of a negotiable instrument sells his right to another person
without . The assignee is entitled to get possession and can recover the
amount due on the instrument from the parties thereto.
Of the two methods of transfer of negotiable instruments discussed,
transfer by negotiation is recognised by the Negotiable InstrumentAct.

 Negotiation and Assignment Distinguished

The various points of distinction between negotiation and assignment are

as below:

1. Negotiation requires delivery only to constitute a transfer, whereas

assignment requires a written document signed by the transfer or.
2. Consideration is always presumed in the case of transfer by
negotiation. In the case of assignment consideration must be proved.
3. In case of negotiation, notice of transfer is not necessary, whereas in
the case of assignment notice of the transfer must be given by the assignee
to the debtor.
4. The assignee takes the instrument subject to all the defects in the
title of the transferor. If the title of the assignor was defective the title of the
assignee is also defective. However, in case of negotiation the transferee
takes the instrument free from all the defects in the title of the transferor. A

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holder in due course is not affected by any defect in the title of the
transferor. He may therefore have a better title than the transferor.
5. In case of negotiation a transferee can sue the third party in his own
name. But an assignee cannot do so.

 Importance of delivery in negotiation

Delivery is a voluntary transfer of possession from one person to another.

Delivery is essential to complete any contract on a negotiable instrument
whether it be contract of making endorsement or acceptance. The property
in the instrument does not pass unless the delivery is fully completed.
Section 46 of the Act provides that a negotiable instrument is not made or
accepted or endorsed unless it is delivered to a proper person. For instance,
if a person signs a promissory note and keeps it with himself, he cannot be
said to have made a promissory note; only when it is delivered to the payee
that the promissory note is made.

Delivery may be actual or constructive. Delivery is actual when it is

accompanied by actual change of possession of the instrument. Constructive
delivery is effected without any change of actual possession.

 ENDORSEMENT

The word ‘endorsement’ in its literal sense means, writing on the back of an
instrument. But under the Negotiable Instruments Act it means, the writing
of one’s name on the back of the instrument or any paper attached to it with
the intention of transferring the rights therein. Thus, endorsement is
signing a negotiable instrument for the purpose of negotiation. The person
who effects an endorsement is called an ‘endorser’, and the person to
whom negotiable instrument is transferred by endorsement is called the
‘endorsee’.

 Essentials of a valid endorsement

The following are the essentials of a valid endorsement:

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1. It must be on the instrument. The endorsement may be on the back or
face of the instrument and if no space is left on the instrument, it may be
made on a separate paper attached to it called all on age. It should usually
be in ink.
2. It must be made by the maker or holder of the instrument. A stranger
cannot endorse it.
3. It must be signed by the endorser. Full name is not essential. Initials
may suffice. Thumb-impression should be attested. Signature may be made
on any part of the instrument. A rubber stamp is not accepted but the
designation of the holder can be done by a rubberstamp.
4. It may be made either by the endorser merely signing his name on the
instrument (it is a blank endorsement) or by any words showing an
intention to endorse or transfer the instrument to a specified person (it is
an endorsement in full). No specific form of words is prescribed for an
endorsement. But intention to transfer must be present. When in a bill or
note payable to order the endorsee’s name is wrongly spelt, he should
when he endorses it, sign the name as spelt in the instrument and write the
correct spelling within brackets after his endorsement.
5. It must be completed by delivery of the instrument. The delivery must
be made by the endorser himself or by somebody on his behalf with the
intention of passing property therein. Thus, where a person endorses an
instrument to another and keeps it in his papers where it is found after his
death and then delivered to the endorsee, the latter gets no right on the
instrument.
6. It must be an endorsement of the entire bill. A partial endorsement
i.e. which purports to transfer to the endorse a part only of the amount
payable does not operate as a valid endorsement.
If delivery is conditional, endorsement is not complete until the condition is
fulfilled.

 Who may endorse?

The payee of an instrument is the rightful person to make the first

endorsement. Thereafter the instrument may be endorsed by any person
who has become the holder of the instrument. The maker or the drawer
cannot endorse the instrument but if any of them has become the holder
thereof he may endorse the instrument. (Sec. 51).

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The maker or drawer cannot endorse or negotiate an instrument unless he
is in lawful possession of instrument or is the holder there of. A payee or
indorsee cannot endorse or negotiate unless he is the holder thereof.

 Classes of endorsement

An endorsement may be:

(1) Blank or general.
(2) Special or full.
(3) Partial.
(4) Restrictive.
(5) Conditional.

(a) Blank or general endorsement (Sections 16 and54).

It is an endorsement when the endorser merely signs on the instrument

without mentioning the name of the person in whose favour the
endorsement is made. Endorsement in blank specifies no endorsee. It
simply consists of the signature of the endorser on the endorsement. A
negotiable instrument even though payable to order becomes a bearer
instrument if endorsed in blank. Then it is transferable by mere delivery. An
endorsement in blank may be followed by an endorsement in full.
Example: A bill is payable to X. X endorses the bill by simply affixing his
signature. This is an endorsement in blank by X. In this case the bill
becomes payable to bearer.

There is no difference between a bill or note indorsed in blank and one

payable to bearer. They can both be negotiated by delivery.

(b) Special or full endorsement (Section16)

When the endorsement contains not only the signature of the endorser but
also the name of the person in whose favour the endorsement is made, then
it is an endorsement in full. Thus, when endorsement is made by writing the
words “Pay to A or A’s order,” followed by the signature of the endorser, it
is an endorsement in full. In such an endorsement, it is only the endorsee
who can transfer the instrument.

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Conversion of endorsement in blank into endorsement in full: When a
person receives a negotiable instrument in blank, he may without signing
his own name, convert the blank endorsement into an endorsement in full
by writing above the endorser’s signature a direction to pay to or to the
order of himself or some other person. In such a case the person is not
liable as the endorser on the bill. In other words, the person transferring
such an instrument does not incur all the liabilities of an endorser.
(Section49).

Example: A is the holder of a bill endorsed by B in blank. A writes over B’s

signature the words “Pay to C or order.” A is not liable as endorser but the
writing operates as an endorsement in full from B to C.

Where a bill is endorsed in blank, or is payable to bearer and is afterwards

endorsed by another in full, the bill remains transferable by delivery with
regard to all parties prior to such endorser in full. But such endorser in full
cannot be sued by any one except the person in whose favour the
endorsement in full is made. (Section 55).

Example: C the payee of a bill endorses it in blank and delivers it to D, who

specially endorses it to E or order. E without endorsement transfers the bill
to F. F as the bearer is entitled to receive payment or to sue the drawer, the
acceptor, or C who endorsed the bill in blank but he cannot sue D orE.

(c) Partial endorsement (Section56)

A partial endorsement is one which purports to transfer to the endorsee a

part only of the amount payable on the instrument. Such an endorsement
does not operate as a negotiation of the instrument.

Example: A is the holder of a bill for Rs.1000. He endorses it “pay to B or

order Rs.500.” This is a partial endorsement and invalid for the purpose of
negotiation.

(d) Restrictive endorsement (Section50)

The endorsement of an instrument may contain terms making it restrictive.

Restrictive endorsement is one which either by express words restricts or
prohibits the further negotiation of a bill or which expresses that it is not a

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complete and unconditional transfer of the instrument but is a mere
authority to the endorsee to deal with bill as directed by such endorsement.

“Pay C,” “Pay C for my use,” “Pay C for the account of B” are instances of
restrictive endorsement. The endorsee under a restrictive endorsement
acquires all the rights of the endoser except the right of negotiation.

 Conditional or qualified endorsement

It is open to the endorser to annex some condition to his owner liability on
the endorsement. An endorsement where the endorsee limits or negatives
his liability by putting some condition in the instrument is called a
conditional endorsement. A condition imposed by the endorser may be a
condition precedent or a condition subsequent. An endorsement which
says that the amount will become payable if the endorsee attains majority
embodies a condition precedent. A conditional endorsement unlike the
restrictive endorsement does not affect the negotiability of the instrument.
It is also some times called qualified endorsement. An endorsement may be
made conditional or qualified in any of the following forms:

(i) ‘Sans recourse’ endorsement: An endorser may be express word

exclude his own liability thereon to the endorser or any subsequent holder
in case of dishonour of the instrument. Such an endorsement is called an
endorsement sans recourse (without recourse). Thus ‘Pay to A or order
sans recourse, ‘pay to A or order without recourse to me,’are instances of
this type of endorsement. Here if the instrument is dishonoured, the
subsequent holder or the indorsee cannot look to the indorser for payment
of the same.
An agent signing a negotiable instrument may exclude his personal liability
by using words to indicate that he is signing as agent only. The same rule
applies to directors of a company signing instruments on behalf of a
company. The intention to exclude personal liability must be clear.
Where an endorser so excludes his liability and afterwards becomes the
holder of the instrument, all intermediate endorsers are liable to him.
Example: A is the holder of a negotiable instrument. Excluding personal
liability by an endorsement without recourse, he transfers the instrument
to B, and B endorses it to C, who endorses it to A. A can recover the amount
of the bill from B and C.
(ii) Facultative endorsement: An endorsement where the endorser
extends his liability or abandons some right under a negotiable instrument,

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is called a facultative endorsement. “Pay A or order, Notice of dishonour
waived” is an example of facultative endorsement.
(iii) ‘Sans frais’ endorsement: Where the endorser does not want the
endorsee or any subsequent holder, to incur any expense on his account on
the instrument, the endorsement is ‘sans frais’.
(iv) Liability dependent upon a contingency: Where an endorser makes
his liability depend upon the happening of a contingent event, or makes the
rights of the endorsee to receive the amount depend upon any contingent
event, in such a case the liability of the endorser will arise only on the
happening of that contingent event. Thus, an endorser may write ‘Pay A or
order on his marriage with B’. In such a case, the endorser will not be liable
until the marriage takes place and if the marriage becomes impossible, the
liability of the endorser comes to an end.

 Effects of endorsement

The legal effect of negotiation by endorsement and delivery is:

(i) to transfer property in the instrument from the endorser to the
endorsee.
(ii) to vest in the latter the right of further negotiation, and
(iii) a right to sue on the instrument in his own name against all the other
parties (Section50).

 Cancellation of endorsement

When the holder of a negotiable instrument, without the consent of the

endorser destroys or impairs the endorser’s remedy against prior party, the
endorser is discharged from liability to the holder to the same extent as if
the instrument had been paid at maturity (Section40).

 Negotiation back

‘Negotiation back’ is a process under which an endorsee comes again into

possession of the instrument in his own right. Where a bill is re-endorsed to
a previous endorser, he has no remedy against the intermediate parties to
whom he was previously liable though he may further negotiate thebill.

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 INSTRUMENTS WITHOUT CONSIDERATION

A person cannot pass a better title than he himself possesses. A person who
is a mere finder of a lost goods or a thief or one who obtains any article by
fraud or for an unlawful consideration does not get any title to the thing so
acquired. The true owner can recover it not only from him but from any
person to whom he may have sold it. But there is a difference between the
transfer of ordinary goods and negotiation of negotiable instruments. The
Negotiable Instruments Act provides protection to those persons who
acquire the instruments in good faith and for valuable consideration. A
holder in due course who has no means to discover the defect of title in an
instrument of any previous holder when the instrument may have passed
through several hands must be protected if he obtains the instrument for
value and in good faith.

Section 58 of the Act provides that no person in possession of an instrument

with a defect of title can claim the amount of the instrument unless he is a
holder in due course. The moment an instrument comes into the hands of a
holder in due course, not only does he get a title which is free from all
defects, but having passed through his hands the instrument is cleaned of
all defects.

 Lost instruments

Where the holder of a bill or note loses it, the finder gets no title to it. The
finder cannot lawfully transfer it. The man who lost it can recover it from
the finder. But if the instrument is transferable by mere delivery and there
is nothing on its face to show that it does not belong to the finder, a holder
obtaining it from the finder in good faith and for valuable consideration and
before maturity is entitled to the instrument and can recover payment from
all the parties thereof. If the instrument is transferable by endorsement, the
finder cannot negotiate it except by forging the endorsement.

The holder of the instrument when it is lost must give a notice of loss to all
the parties liable on it and also a public notice by advertisement. The holder
of a lost bill remains owner in law and as such on maturity can demand
payment from the acceptor, and if is dishonoured he must give notice of
dishonour to prior parties. The owner of the lost bill has a right to obtain

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the duplicate from the drawer and on refusal he can sue the drawer for
thesame.

 Stolen instrument

The position of thief of an instrument is exactly the same as that of a finder

of lost instruments. A thief acquires no title to an instrument if he receives
payment on it the owner can sue him for the recovery of the amount. But if
an instrument payable to bearer is stolen and if transferred to a holder in
due course, the owner mustsuffer.

 Instruments obtained by fraud

It is of the essence of all contracts including those on negotiable

instruments, that they must have been brought about by free consent of the
parties competent to contract. Any contract to which consent has been
obtained by fraud is voidable at the option of the person whose consent was
so obtained. A person who obtains an instrument by fraud gets a defective
title. But if such an instrument passes into the hands of a holder in due
course, the plea of fraud will not be available against him. If however, it
could be shown that a person without negligence on his part was induced
to sign an instrument it being represented to him to be a document of a
different kind he would not be liable even to a holder in due course.

 Instrument obtained for an unlawful consideration

The general rules as to the legality of object or consideration of a contract

apply to contracts on negotiable instruments also. An instrument given for
an illegal consideration is void and does not covey a valid title to the holder.
He cannot enforce payment against any party thereto. Thus, a bill of
exchange given in consideration of future illicit cohabitation is void. But if
such an instrument passes into the hands of a holder in due course, he
obtains a good and complete title to it.

 Forged instrument

Forgery confers no title and a holder acquires no title to a forged

instrument. A forged instrument is treated as an ullity. Forgery with the
intention of obtaining title to an instrument would include:

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(1) fraudulently writing the name of an existing person,
(2) signing the name of a fictitious person with the intention that it may
pass that of a real person, or
(3) signing one’s own name with the intention that the signature may
pass as the signature of some other person of the same name.

Example: A bill is payable to Ram Sunder or order. At maturity it

wrongfully comes into the possession of another Ram Sunder who knows
that he has no claim on the bill. He puts his own signature and the acceptor
pays him. The bill is not discharged and the acceptor remains liable to Ram
Sunder who is the owner of the bill.

A forged instrument has no existence in the eyes of law. A title which never
came into existence cannot be improved even if it passes into the hands of
a holder in due course. A forges B’s signature on a promissory note and
transfers the same to C who takes it in good faith for value. C gets no title
of the note even though he is a holder in due course.

Examples: (a) On a note for Rs.1000, A forges B’s signature to it as maker.

C, a holder who takes it bonafide and for value acquires no title to the note.
(b) On a bill for Rs.1000 A’s acceptance to the bill is forged. The bill comes
into hands of B, a bonafide holder for value, B acquires no title to thebill.

 Forged endorsement

The case of a forged endorsement is slightly different. If an instrument is

endorsed in full, it cannot be negotiated except by an endorsement signed
by the person to whom or to whose order the instrument is payable, for the
endorsee obtains title only through his endorsement. If an endorsement is
forged, the endorsee acquires no title to the instrument even if he is a
bonafide purchaser. On the other hand, if the instrument is a bearer
instrument or has been endorsed in blank, and there is a forged
endorsement the holder gets a good title because holder in such a case
derives title by delivery and not by endorsement. Bankers are specially
protected against forged endorsement under section 85 of theAct.

Examples: (a) A bill is endorsed, “Pay X or order.” X must endorse the

bill and if his signature is forged, the bill is worthless.

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(b) A bill is payable to “X or order.” It is stolen from X and the thief
forges X’s endorsement and endorses it to Y who takes it in good faith and
for value. Y acquires no title to the bill.
(c) A bill payable to “A or order” is endorsed in blank by A. It comes
into the hands of B. B by simple delivery passes it to C. C forges B’s
endorsement and transfers it to D. As D does not derive his title through the
forged endorsement of B, but through the genuine endorsement of A, he
obtains a good title to the instrument in spite of the intervening for get
endorsement.

 Instrument without consideration

Sections 43 to 45 of the Negotiable Instrument Act deal with the

consequences of failure or absence of consideration in negotiable
instruments. In the case of negotiable instruments consideration is
presumed to exist between the parties unless the contrary is proved. As
between immediate parties, if an instrument is made, drawn or endorsed
without consideration, or for a consideration which subsequently fails, it is
void. As between immediate parties, failure of consideration has the same
effect as the absence of consideration. For instance if a promissory note is
delivered by the maker to the payee as a gift, it cannot be enforced against
such maker.

Examples: (a) C the holder of a bill endorses it in blank to D receiving no

value. D for value transfers it by delivery to E. E is a holder of value.

(b) A is the holder of a bill for consideration. A endorses it to B, without

consideration. The property in the bill passes to B. The bill is dishonoured
at maturity. B cannot sue A on the bill.

As between remote parties, the defence of absence or failure of

consideration is not available at all. The holder in due course who has paid
consideration can recover it from all prior parties immaterial of the fact
whether any of them has received consideration or not.

Where there is a partial absence or failure of consideration, as between

immediate parties, only that part can be recovered which was actually paid.
However, a holder in due course is not affected by this rule. But even
between immediate parties, where the part of the consideration which is

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absent or cannot be ascertained without collateral inquiry, the whole of the
amount is recoverable.

Examples: (a) A owes B Rs. 500. B draws a bill on A for Rs. 1000. A to
accommodate B and at his request accepts it. If B sues A on the bill he can
only recover Rs.500.
(b) A draws a bill on B for Rs. 500 payable to the order A. B accepts the bill
but subsequently dishonours it by non-payment. A sues B on the bill. B
proves that it was accepted for value as to Rs. 400 and as an
accommodationto A (the plaintiff )for Rs.100.Acanonlyrecover Rs. 400. But
if this bill gets into the hands of a holder in due course, he can recover the
full amount of Rs. 500.

 HOLDER IN DUECOURSE

Section 9 of the Act defines ‘holder in due course’ as any person who
(i) for valuable consideration,
(ii) becomes the possessor of a negotiable instrument payable to be are or
the indorsee or payee thereof,
(iii) before the amount mentioned in the document be comes payable,and
(iv) without having sufficient cause to believe that any defect existed in
the title of the person from whom he derives his title. (English law does not
regard payee as a holder in due course).

The essential qualification of a holder in due course may, therefore, be

summed up as follows:

1. He must be a holder for valuable consideration. Consideration

must not be void or illegal, e.g. a debt due on a wagering agreement. It may,
however, be inadequate. A donee, who acquired title to the instrument by
way of gift, is not a holder in due course, since there is no consideration to
the contract. He cannot maintain any action against the debtor on the
instrument. Similarly, money due on a promissory note executed in
consideration of the balance of the security deposit for the lease of a house
taken for immoral purposes cannot be recovered by a suit.

2. He must have become a holder (passessor) before the date of

maturity of the negotiable instrument. Therefore, a person who takes a

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bill or promissory note on the day on which it becomes payable cannot
claim rights of a holder in due course because he takes it after it becomes
payable, as the bill or note can be discharged at any time on that day.
3. He must have become holder of the negotiable instrument in
good faith. Good faith implies that he should not have accepted the
negotiable instrument after knowing about any defect in the title to the
instrument. But, notice of defect in the title received subsequent to the
acquisition of the title will not affect the rights of a holder in due course.
Besides good faith, the Indian Law also requires reasonable care on the part
of the holder before he acquires title of the negotiable instrument. He
should take the instrument without any negligence on his part. Reasonable
care and due caution will be the proper test of his bona fides. It will not be
enough to show that the holder acquired the instrument honestly, if in fact,
he was negligent or careless. Under conditions of sufficient indications
showing the existence of a defect in the title of the transferor, the holder
will not become a holder in due course even though he might have taken
the instrument without any suspicion or knowledge.
Example: (i) A bill made out by pasting together pieces of a tom bill
taken without enquiry will not make the holder, a holder in due course. It
was sufficient to show the intention to cancel the bill. A bill should not be
taken without enquiry if suspicion has been aroused.
(ii) A post-dated cheque is not irregular. It will not preclude a bonafide
purchase instrument from claiming the rights of a holder in duecourse.
It is to be noted that it is the notice of the defect in the title of his immediate
transferor which deprives a person from claiming the right of a holder in
due course. Notice of defect in the title of any prior party does not affect the
title of theholder.

4. A holder in due course must take the negotiable instrument complete

and regular on the face of it.

Privileges of a holder in due course

1. Instrument purged of all defects: A holder in due course who gets

the instrument in good faith in the course of its currency is not only himself
protected against all defects of title of the person from whom he has
received it, but also serves, as a channel to protect all subsequent holders. A
holder in due course can recover the amount of the instrument from all
previous parties although, as a matter of fact, no consideration was paid by

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some of the previous parties to instrument or there was a defect of title in
the party from whom he took it. Once an instrument passes through the
hands of a holder in due course, it is purged of all defects. It is like a current
coin. Who-so-ever takes it can recover the amount from all parties previous
to such holder (Sec.53).

It is to be noted that a holder in due course can purify a defective title but
cannot create any title unless the instrument happens to be a bearer one.

Examples: (i) A obtains Bs acceptance to a bill by fraud. A indorses it

to C who takes it as a holder in due course. The instrument is purged of its
defects and C gets a good title to it. In case C indorses it to some other
person he will also get a good title to it except when he is also a party to the
fraud played by A.

(ii) A bill is payable to “A or order”. It is stolen from A and the thief

forges A’s signatures and indorses it to B who takes it as a holder in due
course. B cannot recover the money. It is not a case of defective title but a
case where title is absolutely absent. The thief does not get any title
therefore, cannot transfer any title to it.

(iii) A bill of exchange payable to bearer is stolen. The thief delivers it

to B, a holder in due course. B can recover the money of the bill.

2. Rights not affected in case of an inchoate instrument: Right of a

holder in due course to recover money is not at all affected even though
the instrument was originally an inchoate stamped instrument and the
transferor completed the instrument for a sum greater than what was
intended by the maker. (Sec.20)

3. All prior parties liable: All prior parties to the instrument (the
maker or drawer, acceptor and intervening indorers) continue to remain
liable to the holder in due course until the instrument is duty satisfied. The
holder in due course can file a suit against the parties liable to pay, in his
own name (Sec.36)

4. Can enforce payment of a fictitious bill: Where both drawer and

payee of a bill are fictitious persons, the acceptor is liable on the bill to a
holder in due course. If the latter can show that the signature of the

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supposed drawer and the first indorser are in the same hand, for the bill
being payable to the drawer’s order the fictitious drawer must indorse the
bill before he can negotiate it. (Sec.42).
5. No effect of conditional delivery: Where negotiable instrument is
delivered conditionally or for a special purpose and is negotiated to a
holder in due course, a valid delivery of it is conclusively presumed and he
acquired good title to it. (Sec.46).

Example: A, the holder of a bill indorses it “B or order” for the express

purpose that B may get it discounted. B does not do so and negotiates it to
C, a holder in due course. D acquires a good title to the bill and can sue all
the parties on it.

6. No effect of absence of consideration or presence of an unlawful

consideration: The plea of absence of or unlawful consideration is not
available against the holder in due course. The party responsible will have
to make payment (Sec.58).

7. Estoppel against denying original validity of instrument: The plea

of original invalidity of the instrument cannot be put forth, against the
holder in due course by the drawer of a bill of exchange or cheque or by an
acceptor for the honour of the drawer. But where the instrument is void on
the face of it e.g. promissory note made payable to “bearer”, even the holder
in due course cannot recover the money. Similarly, a minor cannot be
prevented from taking the defence of minority. Also, there is no liability if
the signatures are forged. (Sec.120).

8. Estoppel against denying capacity of the payee to indorsee: No

maker of promissory note and no acceptor of a bill of exchange payable to
order shall, in a suit therein by a holder in due course, be permitted to resist
the claim of the holder in due course on the plea that the payee had not the
capacity to indorse the instrument on the date of the note as he was a minor
or insane or that he had no legal existence (Sec121)

9. Estoppel against indorser to deny capacity of parties: An indorser

of the bill by his endorsement guarantees that all previous endorsements
are genuine and that all prior parties had capacity to enter into valid
contracts. Therefore, he on a suit thereon by the subsequent holder, cannot

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deny the signature or capacity to contract of any prior party to the
instrument.

 DISHONOUR OF A NEGOTIABLEINSTRUMENT

When a negotiable instrument is dishonoured, the holder must give a

notice of dishonour to all the previous parties in order to make them liable.
A negotiable instrument can be dishonoured either by non- acceptance or
by non-payment. A cheque and a promissory note can only be dishonoured
by non-payment but a bill of exchange can be dishohoured either by non-
acceptance or by non-payment.

 Dishonour by non-acceptance (Section 91)

A bill of exchange can be dishonoured by non-acceptance in the following

ways:

1. If a bill is presented to the drawee for acceptance and he does not

accept it within 48 hours from the time of presentment for acceptance.
When there are several drawees even if one of them makes a default in
acceptance, the bill is deemed to be dishonoured unless these several
drawees are partners. Ordinarily when there are a number of drawees all of
them must accept the same, but when the drawees are partners acceptance
by one of them means acceptance by all.
2. When the drawee is a fictitious person or if he cannot be traced after
reasonable search.
3. When the drawee is incompetent to contract, the bill is treated as
dishonoured.
4. When a bill is accepted with a qualified acceptance, the holder may
treat the bill of exchange having been dishonoured.
5. When the drawee has either become insolvent or is dead.
6. When presentment for acceptance is excused and the bill is not
accepted. Where a drawee in case of need is named in a bill or in any
indorsement thereon, the bill is not dishonoured until it has been
dishonoured by such drawee.

 Dishonour by non-payment (Section 92)

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A bill after being accepted has got to be presented for payment on the date
of its maturity. If the acceptor fails to make payment when it is due, the bill
is dishonoured by non-payment. In the case of a promissory note if the
maker fails to make payment on the due date the note is dishonoured by
non-payment. A cheque is dishonoured by non-payment as soon as a banker
refuses to pay.
An instrument is also dishonoured by non-payment when presentment for
payment is excused and the instrument when overdue remains unpaid (Sec
76).

Effect of dishonour: When a negotiable instrument is dishonoured either

by non acceptance or by non-payment, the other parties thereto can be
charged with liability. For example if the acceptor of a bill dishonours the
bill, the holder may bring an action against the drawer and the indorsers.
There is a duty cast upon the holder towards those whom he wants to make
liable to give notice of dishonor tothem.

Notice of dishonour: Notice of dishonour means the actual notification of

the dishonour of the instrument by non-acceptance or by non-payment.
When a negotiable instrument is refused acceptance or payment notice of
such refusal must immediately be given to parties to whom the holder
wishes to make liable. Failure to give notice of the dishonour by the holder
would discharge all parties other than the maker or the acceptor (Sec.93).

Notice by whom: Where a negotiable instrument is dishonoured either by

non- acceptance or by non-payment, the holder of the instrument or some
party to it who is liable thereon must give a notice of dishonour to all the
prior parties whom he wants to make liable on the instrument (Section 93).
The agent of any such party may also be given notice of dishonour. A notice
given by a stranger is not valid. Each party receiving notice of dishonour
must, in order to render any prior party liable give notice of dishonour to
such party within a reasonable time after he has received it. (Sec.95)

When an instrument is deposited with an agent for presentment and is

dishonoured, he may either himself give notice to the parties liable on the
instrument or he may give notice to his principal. If he gives notice to his
principal, he must do so within the same time as if he were the holder. The
principal, too, in his turn has the same time for giving notice as if the agent
is an independent holder. (Sec. 96)

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Notice to whom?: Notice of dishonour must be given to all parties to whom

the holder seeks to make liable. No notice need be given to a maker,
acceptor or drawee, who are the principal debtors (Section93).
Notice of dishonour may be given to an endorser. Notice of dishonour
may be given to a duly authorised agent of the person to whom it is
required to be given. In case of the death of such a person, it may be given to
his legal representative. Where he has been declared insolvent the notice
may be given to him or to his official assignee (Section 94). Where a party
entitled to a notice of dishonour is dead, and notice is given to him in
ignorance of his death, it is sufficient (Section 97).

Mode of notice: The notice of dishonour may be oral or written or partly

oral and partly written. It may be sent by post. It may be in any form but it
must inform the party to whom it is given either in express terms or by
reasonable intendment that the instrument has been dishonoured and in
what way it has been dishonoured and that the person served with the
notice will be held liable there on.

What is reasonable time?: It is not possible to lay down any hard and fast
rule for determining what is reasonable time. In determining what is
reasonable time, regard shall be had to the nature of the instrument, the
usual course the dealings with respect to similar instrument, the distance
between the parties and the nature of communication between them. In
calculating reasonable time, public holidays shall be excluded (Section105).

Section 106 lays down two different rules for determining reasonable time
in connection with the notice of disnonour (a) when the holder and the
party to whom notice is due carry on business or live in different places, (b)
when the parties live or carry on business in the same place.

In the first case the notice of dishonour must be dispatched by the next post
or on the day next after the day of dishonour. In the second case the notice
of dishonour should reach its destination on the day next after dishonour.

Place of notice: The place of business or (in case such party has no place of
business) at the residence of the party for whom it is intended, is the place
where the notice is to given. If the person who is to give the notice does not
know the address of the person to whom the notice is to be given, he must

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make reasonable efforts to find the latter’s address. But if the party entitled
to the notice cannot after due search be found, notice of dishonour is
dispensed with.

 Duties of the holder upon dishonour

(1) Notice of dishonour. When a promissory note, bill of exchange or

cheque is dishonoured by non-acceptance or non-payment the holder must
give notice of dishonour to all the parties to the instrument whom he seeks
to make liable thereon. (Sec.93)

(2) Noting and protesting. When a promissory note or bill of exchange

has been dishonoured by non-acceptance or non-payment, the holder may
cause such dishonour to be noted by a notary public upon the instrument
or upon a paper attached thereto or partly upon each (Sec. 99). The holder
may also within a reasonable time of the dishonour of the note or bill, get
the instrument protested by notary public (Sec. 100).

(3) Suit for money. After the formality of noting and protesting is gone
through, the holder may bring a suit against the parties liable for the
recovery of the amount due on the instrument.

Instrument acquired after dishonour: The holder for value of a

negotiable instrument as a rule, is not affected by the defect of title in his
transferor. But this rule is subject to two important exceptions
(i) when the holder acquires it after maturity and
(ii) when he acquires it with notice of dishonour.

The holder of a negotiable instrument who acquired it after dishonour,

whether by non-acceptance or non-payment, with notice thereof, or after
maturity, has only, as against the other parties, the rights thereon of his
transfer. (Sec.59).

 NOTING ANDPROTESTING

When a negotiable instrument is dishonoured the holder may sue his prior
parties i.e the drawer and the indorsers after he has given a notice of
dishonour to them. The holder may need an authentic evidence of the fact
that a negotiable instrument has been dishonoured. When a cheque is

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dishonoured general1y the bank who refuses payment returns back the
cheque giving reasons in writing for the dishonour of the cheque. Sections
99 and l00 provide convenient methods of authenticating the fact of
dishonour of a bill of exchange and a promissory note by means of ‘noting’
and‘protest’.
 Noting

As soon as a bill of exchange or a promissory note is dishonoured, the

holder can after giving the parties due notice of dishonour, sue the parties
liable thereon. Section 99 provides a mode of authenticating the fact of the
bill having been dishonoured. Such mode is by noting the instrument.
Noting is a minute recorded by a notary public on the dishonoured
instrument or on a paper attached to such instrument. When a bill is to be
noted, the bill is taken to a notary public who represents it for acceptance
or payment as the case may be and if the drawee or acceptor still refuses to
accept or pay the bill, the bill is noted as stated above.

Noting should specify in the instrument,

(a) the fact of dishonour,
(b) the date of dishonour,
(c) the reason for such dishonour, if any
(d) the notary’s charges,
(e) a reference to the notary’s register and
(f) the notary’sinitials.

Noting should be made by the notary within a reasonable time after

dishonour. Noting and protesting is not compulsory but foreign bills must
be protested for dishonour when such protest is required by the law of the
place where they are drawn. Cheques do not require noting and protesting.
Noting by itself has no legal effect. Still it has some advantages. If noting is
done within a reasonable time protest may be drawn later on. Noting
without protest is sufficient to allow a bill to be accepted forhonour.

 Protest

Protest is a formal certificate of the notary public attesting the dishonour of

the bill by non-acceptance or by non-payment. After noting, the next step
for notary is to draw a certificate of protest, which is a formal declaration

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on the bill or a copy thereof. The chief advantage of protest is that the court
on proof of the protest shall presume the fact of dishonour.

Besides the protest for non-acceptance and for non-payment the holder
may protest the bill for better security. When the acceptor of a bill becomes
insolvent or suspends payment before the date of maturity, or
when he absconds the holder may protest it in order to obtain better
security for the amount due. For this purpose the holder may employ a
notary public to make the demand on the acceptor and if refused, protest
may be made. Notice of protest may be given to prior parties. When
promissory notes and bills of exchange are required to be protested, notice
of protest must be given instead of notice of dishonour. (Sec.102)

Inland bills may or may not be protested. But foreign bills must be
protested for dishonour when such protest is required by the law of the
place where they are drawn (Sec. 104).

Where a bill is required to be protested under the Act within a specified

time, it is sufficient if it is ‘noted for protest’ within such time. The formal
protest may be given at anytime after the noting (Sec. 104A)

 Contents of protest

Section 101 of the Act lays down the contents of a regular and perfect
protest which are as follows:
1. The instrument itself or a literal transcript of the instrument; and of
everything written or printed there upon.
2. The name of the person for whom and against whom the instrument has
been protested.
3. The fact of and reasons for dishonour i.e. a statement that payment or
acceptance or better security, as the case may be, has been demanded of
such person by the notary public from the person concerned and he refused
to give it or did not answer or that he could not befound.
4. The time and place of demand and dishonour.
5. The signature of the notary public.
6.In the case of acceptance for honour or payment for honour the person by
whom or for whom such acceptance or payment was offered and effected.

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# Important Questions:-

1. What is Negotiable Instrument ? What are the kinds of Negotiable

Instruments ? How Negotiable Instruments are different from Transferable
Instruments ?

2. What is Endorsement ? Explain different kinds of Endorsement.

3. Write short note on :-

(a) Bills of Exchange
(b) Payment for Honour.

4. Write a note on promissory note.

5. Discuss the various types of crossing of cheques with their legal effects.

6. Explain the penal provisions under Negotiable Instrument Act.

7. Write the Detailed note on Noting and Protest of Negotiable Instrument

8. Define Endorsement? Explain Essential of a valid endorsement and its

kinds, Rules of evidence and compensation.

9. Write a note on Holder and Holder in due course.

10. Explain the Transfer and Negotiation of Negotiable Instruments.

11. Write a note on Dishonor of Cheques.

==========================================================

UNIT-III

RESERVE BANK OF INDIA ACT, 19341

[Act No. 2 of 1934]

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[6th March 1934]

PREAMBLE

An Act to constitute a Reserve Bank of India.

Whereas it is expedient to constitute a Reserve Bank for India

to regulate the issue of Bank notes and the keeping of reserves
with a view to securing monetary stability in 2[India] and
generally to operate the currency any credit system of the
country to its advantage;

And whereas in the present disorganization of the monetary

systems of the world it is not possible to determine what will
be suitable as a permanent basis for the Indian monetary
system;

But whereas it is expedient to make temporary provision on

the basis of the existing monetary system, and to leave the
question of the monetary standard best suited to India to be
considered when the international monetary position has
become sufficiently clear and stable to make it possible to
frame permanent measures;

It is hereby enacted as follows: -

CHAPTER I

PRELIMINARY

1. Short title, extent and commencement.

(1) This Act may be called the Reserve Bank of India Act,1934.
1[(2) It extends to the whole of India 2[* * *].

(3) This section shall come into force at once, and the remaining
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provisions of this Act shall come into force on such date or
dates3as the 4[Central Government] may, by notification in the
Gazette of India, appoint.

2. Definitions.

In this Act, unless there is anything repugnant in the subject or

context, –

5[* * * * *

* * * * *]

6[(aii)] “the Bank” means the Reserve Bank of India

constituted by this Act;

7[(aiii) “Bank for International Settlements” means the body

corporate established with the said name under the law of
Switzerland in pursuance of an agreement dated the 20th
January, 1930, signed at the Hague;]

(b) “the Central Board” means the Central Board of Directors of

theBank;

8[* * * * *

*****

*****

*****

* * * * *]

9[1[(bvi)] “Deposit Insurance Corporation” means the Deposit

Insurance Corporation established under section 3 of the
Deposit Insurance Corporation Act, 1961;]

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2[*****]

3[*****]

4[(bviiia) “Exim Bank” means the Export-Import Bank of India

established under the Export-Import Bank of India Act, 1981;]

5[(bix) “foreign currency” and “foreign exchange” have the

meanings respectively assigned to them in the Foreign
Exchange Regulation Act, 1973;

(c) “Industrial Finance Corporation” means the Industrial

Finance Corporation of India established under the Industrial
Finance Corporation Act,1948;]

6[(ca) “International Development Association” means the

“Association” referred to in the International Development
Association (Status, Immunities and Privileges) Act, 1960;

(cb) “International Finance Corporation” means the

“Corporation” referred to in the International Finance
Corporation (Status, Immunities and Privileges) Act, 1958;

(cc) “International Monetary Fund” and “International Bank for

Reconstruction and Development” mean respectively the
“International Fund” and the “International Bank”, referred to
in the International Monetary Fund and Bank Act, 1945;]

7[(ccc) “National Bank” means the National Bank for

Agriculture and Rural Development established under section
3 of the National Bank for Agriculture and Rural Development
Act, 1981;]

8(cccc) “National Housing Bank” means the National Housing

Bank established under section 3 of the National Housing Bank
Act, 1987;

1[* * * * *
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*****

*****

*****

* * * * *]

2[(cv) “Reconstruction Bank” means the Industrial

Reconstruction Bank of India established under section 3 of the
Industrial Reconstruction Bank of India, Act, 1984;]

(d) “rupee coin” means 3[* * *] rupees which are legal tender
4[in5[India]] under the provisions of the Indian Coinage Act,

1906; 6[* **]

(e) “scheduled bank” means a bank included in the Second

Schedule;

7[(ea) “Sponsor Bank” means a Sponsor Bank as defined in the

Regional Rural Banks Act, 1976;]

8[9[(eb)] “State Bank” means the State Bank of India

constituted under the State Bank of India Act, 1955;]

10[(el) “Small Industries Bank” means the Small Industries

Development Bank of India established under Section 3 of the
Small Industries Development Bank of India Act, 1989”.]

11[* * * * *]

12[(fi) “State Financial Corporation” means any State Financial

Corporation established under the State Financial
Corporations Act 1951;]
1[* * * * *]

2[(g) “Unit Trust” means the Unit Trust of India established

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under section 3 of the Unit Trust of India Act,1963;]

3[(h) “agricultural operations”, “central co-operative bank”,

“co-operative society”, “crops”, “marketing of crops”, “p is ci
culture”, “regional rural bank” and “State co-operative bank”
shall have the meanings respectively assigned to them in the
National Bank for Agriculture and Rural Development
Act,1981;

(i) “co-operative bank”, “co-operative credit society”,

“director”, “primary agricultural credit society”, “primary co-
operative bank” and “primary credit society” shall have the
meanings respectively assigned to them in Part V of the
Banking Regulation Act, 1949;]

CHAPTER II

INCORPORATION, 4[CAPITAL], MANAGEMENT AND

BUSINESS

3. Establishment and incorporation of Reserve Bank.

(1)A bank to be called the Reserve Bank of India shall be

constituted for the purposes of taking over the management of the
currency from the 5[Central Government] and of carrying on the
business of banking in accordance with the provisions of this Act.

(2)The Bank shall be a body corporate by the name of the Reserve

Bank of India, having perpetual succession and a common seal,
and shall by the said name sue and be sued.

6[4. Capital of the Bank.

The capital of the Bank shall be five crores of rupees.]

5. [Increase and reduction of share capital.]

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M.COM- 4th Semester

[Rep. by Act 62 of 1948, s.7 and Sch. (w.e.f. 1-1-1949)].

6. Offices, branches and agencies.

The Bank shall, as soon as may be, establish offices in Bombay,

Calcutta, 1[Delhi and Madras] 2[* * *] and may establish branches
or agencies in any other place in India 3[* * *] or, with the previous
sanction of the 4[Central Government], elsewhere.

5[7. Management.

(1)The Central Government may from time to time give such

directions to the Bank as it may, after consultation with the
Governor of the Bank, consider necessary in the public interest.

(2)Subject to any such directions, the general superintendence

and direction of the affairs and business of the Bank shall be
entrusted to a Central Board of Directors which may exercise all
powers and do all acts and things which may be exercised or done
by the Bank.

6[(3) Save as otherwise provided in regulations made by the

Central Board, the Governor and in his absence the Deputy
Governor nominated by him in this behalf, shall also have powers
of general superintendence and direction of the affairs and the
business of the Bank, and may exercise all powers and do all acts
and things which may be exercised or done by the Bank.]

8. Composition of the Central Board, and term of office of Directors.

7[(1) The Central Board shall consist of the following Directors,

namely:-

(a) a Governor and 8[not more than four] Deputy Governors to

be appointed by the Central Government;
209 | P a g e
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(b) fourDirectors to be nominated by the Central Government,

one from each of the four Local Boards as constituted by
section9;

(c) 9[ten] Directors to be nominated by the Central Government;

and

(d) oneGovernment official to be nominated by the Central

Government;]

(2) The Governor and Deputy Governors shall devote their whole
time to the affairs of the Bank, and shall receive such salaries and
allowances as may be determined by the Central Board, with the
approval of the 1[Central Government]:

2[Provided that the Central Board may, if in its opinion it is

necessary in the public interest so to do, permit the Governor
or a Deputy Governor to undertake, at the request of the
Central Government or any State Government, such part-time
honorary work, whether related to the purposes of this Act or
not, as is not likely to interfere with his duties as Governor or
Deputy Governor, as the case may be:]

3[Provided further that the Central Government may, in

consultation with the Bank, appoint a Deputy Governor as the
Chairman of the National Bank, on such terms and conditions
as that Government may specify.]

(3) ADeputy Governor and the Director nominated under clause

(d) of sub- section (1) may attend any meeting of the Central
Board and take part in its deliberations but shall not be entitled
tovote:

4[Provided that when the Governor is, for any reason, unable
to attend any such meeting, a Deputy Governor authorised by
him in this behalf in writing may vote for him at that meeting.]

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(4) TheGovernor and a Deputy Governor shall hold office for such
term not exceeding five years as the 5[Central Government] may
fix when appointing them, and shall be eligible for re-
appointment.

6[A Director nominated under clause (c) of sub-section (1) shall

7[* * *] hold office for a period of four years 8[and thereafter until

his successor shall have been nominated].]

A Director nominated under clause (d) of sub-section (1) shall

hold office during the pleasure of the 9[Central Government].

(5) No act or proceeding of the Board shall be questioned on the

ground merely of the existence of any vacancy in, or any defect in
the constitution of, the Board.
1[2* * * * *]

(7) A retiring Director shall be eligible for re-nomination.]

3[9. Local Boards, their constitution and functions.

(1)A Local Board shall be constituted for each of the four areas
specified in the First Schedule and shall consist of five members to
be appointed by the Central Government to represent, as far as
possible, territorial and economic interests and the interests of
co-operative and indigenous banks.

(2)The members of the Local Board shall elect from amongst

themselves one person to be the chairman of the Board.

4[(3) Every member of a Local Board shall hold office for a term
of four years and thereafter until his successor shall have been
appointed and shall be eligible for re-appointment.]

(4) A Local Board shall advise the Central Board on such matters
as may be generally or specifically referred to it and shall perform
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M.COM- 4th Semester
such duties as the Central Board may delegate to it.]

10. Disqualifications of Directors and members of Local

Boards.

(1) No person may be a Director or a member of a Local Board who-

(a) is a salaried Government official 5[* * *] 6[* * *],or

(b)is, or at any time has been, adjudicated an insolvent, or

has suspended payment or has compounded with his
creditors, or

(c) is found lunatic or becomes of unsound mind,or

(d) is an officer or employee of any bank,or

7[(e) is a Director of a banking company within the meaning
of clause
(c) of section 5 of the 8[Banking Regulation Act, 1949], or of a
co- operative bank.]
(2) No two persons who are partners of the same mercantile firm,
or are Directors of the same private company, or one of whom is
the general agent of or holds a power of procuration from the
other, or from a mercantile firm of which the other is a partner,
may be Directors or members of the same Local Board at the same
time.

(3)Nothing in clause (a), clause (d) or clause (e) of sub-section (1)

shall apply to the Governor, or to a Deputy Governor, or to the
Director nominated under clause (d) of sub-section (1) of
section8.

11. Removal from and vacation of office.

(1)The 1[Central Government] may remove from office the

Governor, or a Deputy Governor or 2[any other Director or any
member of a Local Board].

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3[*****]

4[(2) A Director nominated under clause (b) or clause (c) of sub-

section (1) of section 8 shall cease to hold office if without leave
from the Central Board he absents himself from three consecutive
meetings of the Board convened under sub-section (1) of
section13.]

(3) The 5[Central Government] shall remove from office any

Director and the Central Board shall remove from office any
member of a Local Board, if such Director or member becomes
subject to any of the disqualifications specified in sub-section (1)
or sub-section (2) of section10.

(4)A Director or member of a Local Board removed or ceasing to

hold office, under the foregoing sub-sections shall not be eligible
for re-appointment either as Director or as member of a Local
Board until the expiry of the term for which his appointment was
made.

(5)The 6[* * *] nomination 7[* * *] as Director or member of a

Local Board of any person who is a member of 8[Parliament or the
Legislature 9[of any
State]]shallbevoid,unless,withintwomonthsofthedateofhis [***]
10

nomination 1[* * *], he ceases to be such member, and, if any

Director or member of a Local Board is elected or nominated as a
member of 2[Parliament or any such Legislature], he shall cease
to be a Director or member of the Local Board as from the date of
such election or nomination, as the case maybe.

(6)A Director may resign his office to the 3[Central Government],

and a member of a Local Board may resign his office to the Central
Board, and on the acceptance of the resignation the office shall
becomevacant.

12. Casual Vacancies and absences

(1)If the Governor or a Deputy Governor by infirmity or

otherwise is rendered incapable of executing his duties or is
213 | P a g e
M.COM- 4th Semester
absent on leave or otherwise in circumstances not involving the
vacation of his appointment, the 4[Central Government] may, after
consideration of the recommendations made by the Central Board
in this behalf, appoint another person to officiate for him, and
such person may, notwithstanding anything contained in clause
(d) of sub-section (1) of section 10, be an officer of theBank.

5[* * * * *]

(3) Where any casual vacancy in the office of any member of a

Local Board occurs 6[* * *], the Central Board may nominate
thereto any 7[* * *] person recommended by the 8[other] members
of the Local Board.

(4)Where any casual vacancy occurs in the office of a Director

other than the vacancies provided for in sub-section (1), the
vacancy shall be filled 9[by the Central Government].

(5)A person nominated 10[* * *] under this section to fill a casual

vacancy shall 11[* * *] hold office for the unexpired portion of the
term of his predecessor.
13. Meetings of the Central Board.

(1)Meetings of the Central Board shall be convened by the

Governor at least six times in each year and at least once in each
quarter.

(2) Any 1[four Directors] may require the Governor to convene a

meeting of the Central Board at any time and the Governor shall
forthwith convene a meeting accordingly.

(3) The Governor, or 2[if for any reason, he is unable to attend,]

the Deputy Governor authorized by the Governor under the
proviso to subsection (3) of section 8 to vote for him, shall preside
at meetings of the Central Board, and, in the event of an equality
of votes, shall have a second or casting vote.

14.to 16. [General meetings. First constitution of the Central

Board. First constitution of Local Board.]
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[Rep. by the Act 62 of 1948, s.7 and Sch. (w.e.f. 1-1-1949).]

17. Business which the Bank may transact.

The Bank shall be authorized to carry on and transact the several

kinds of business hereinafter specified, namely:-

(1) the accepting of money on deposit without interest from and

the collection of money for, 3[* * *] the 4[Central Government],
5[6[* * *] the 7[State] Governments 8[* * *] 9[* * *] local authorities,

banks and any other persons;

(2)(a) the purchase, sale and rediscount of bills of exchange and

promissory notes,10[drawnon11[and payable in India]and arising
out of bonafide
commercial or trade transactions bearing two or more good
signatures, one of which shall be that of a scheduled bank 1[or a
State co-operative bank] 2[or any financial institution, which is
predominantly engaged in the acceptance or discounting of bills of
exchange and promissory notes and which is approved by the
Bank in this behalf] 3[* * *] and 4[maturing,–

in the case of bills of exchange and promissory notes arising

(i)
out of any such transaction relating to the export of goods from
India, within one hundred and eighty days,and

in any other case, within ninety days, from the date of such
(ii)
purchase or rediscount exclusive of days ofgrace;]

(b) the purchase, sale and rediscount of bills of exchange and

promissory notes, 5[drawn 6[and payable in India]] and bearing
two or more good signatures, one of which shall be that of a
scheduled bank 7[or a 8[State] co- operative bank 9[or any
financial institution, which is predominantly engaged in the
acceptance or discounting of bills of exchange and promissory
notes and which is approved by the Bank in this behalf] and
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M.COM- 4th Semester
drawn or issued for the purpose of 10[financing agricultural
operations] or the marketing of crops, and maturing within
11[fifteen months] from the date of such purchase or rediscount,

exclusive of days of grace;

12[* * * * *]

13[(bb) the purchase, sale and rediscount of bills of exchange and

promissory notes drawn and payable in India and bearing two or
more good signatures, one of which shall be that of a State Co-
operative bank] or a State financial corporation 14[or any financial
institution, which is predominantly engaged in
the acceptance or discounting of bills of exchange and promissory
notes and which is approved by the Bank in this behalf, and drawn
or issued for the purpose of financing the production or marketing
activities of cottage and small scale industries approved by the
Bank and maturing within twelve months from the date of such
purchase or rediscount, exclusive of days of grace, provided that
the payment of the principal and interest of such bills of exchange
or promissory notes is fully guaranteed by the State Government;]

(c)the purchase, sale and rediscount of bills of exchange and

promissory notes 1[drawn 2[and payable in India]] and bearing
the signature of a scheduled bank, 3[* * *] and issued or drawn for
the purpose of holding or trading in securities of 4[the Central
Government 5[or a 6[State] Government]] 7[* * *] and maturing
within ninety days from the date of such purchase or rediscount,
exclusive of days of grace;

(3) (a) the purchase from and sale to scheduled banks 8[* * *] of
9[foreign exchange] 10[* **].

11[(b) the purchase, sale and rediscount of bills of exchange

(including treasury bills) drawn in or on any place in any country
outside India which is a member of the International Monetary
Fund and maturing,–

(i)in the case of bills of exchange arising out of any bona fide
transaction relating to the export of goods from India, within
216 | P a g e
M.COM- 4th Semester
one hundred and eighty days, and

(ii) in any other case, within ninety

days, from the date of such purchase

or rediscount:

Provided that no such purchase, sale or rediscount shall be made

in India except with a scheduled bank or a State co-operative
bank;]

1[* * * * *]

2[(3A) the making to any scheduled bank or State co-operative

bank, of loans and advances, against promissory notes of such
bank, repayable on demand or on the expiry of fixed periods not
exceeding one hundred and eighty days;

Provided that the borrowing bank furnishes a declaration in

writing, to the effect that –

(i) it holds bills of exchange arising out of any transaction

relating to the export of goods from India, of a value not less
than the amount of such loans or advances, –

(a) drawn in India and on any place in any country outside

India which is a member of the International Monetary Fund or
in any other country notified in this behalf by the Bank in the
Gazette of India, and

3[(b) maturing not later than one hundred and eighty days
from the date of the loan or advance, and it will, so long as any
part of such loans and advances remains unpaid, continue to
hold such bills of exchange of a value not less than the amount
of such loans or advances outstanding for the time being; or]

4[(ii) it has granted a pre-shipment loan or advance to an

217 | P a g e
M.COM- 4th Semester
exporter or any other person in India in order to enable him to
export goods from India, the amount of the loan or advance
drawn and outstanding at any time being not less than the
outstanding amount of the loan or advance obtained by the
borrowing bank from the Bank;]]

5[(3B) the making to any scheduled bank or State co-operative

bank of loans and advances repayable on demand or on the expiry
of fixed periods not exceeding one hundred and eighty days
against promissory notes of such bank;

Provided that the borrowing bank furnishes a declaration in

writing to the effect that it has made loans and advances for bona
fide commercial or trade transactions or for financing agricultural
operations or the marketing of crops or for other agricultural
purposes as set out in the declaration and the said declaration
includes such other particulars as may be required by the Bank:]

(4) themakingto6[***]localauthorities,scheduledbanks7[1[***]
2[State] co-operative banks 3[and State Financial Corporations 4[* *
*]] of
loans and advances, repayable on demand or on the expiry of
fixed periods not exceeding ninety days, against the security of –

(a)stocks, funds and securities (other than immovable

property) in which a trustee is authorized to invest trust
money by any Act of Parliament 5[of the United Kingdom] or by
any law for the time being in force in 6[India]7[* **];

(b) gold or silver or documents of title to the same;

(c) such bills of exchange and promissory notes as are eligible

for purchase or rediscount by the Bank 8[or as are fully
guaranteed as to the repayment of the principal and payment
of interest by a State Government];

(d) promissory notes of any scheduled bank 9[ 10[or 11[State]]

Co- operative bank], supported by documents of title to goods
12[such documents having been transferred], assigned, or

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pledged to any such bank as security for 13[a loan or advance
made] for bona fide commercial or trade transactions, or for
the purpose of 14[financing agricultural operations] or the
marketing ofcrops:

15[Provided that loans and advances made against the

security of bills of exchange and promissory notes arising
out of any transaction relating to the export of goods from
India shall be repayable on demand or on the expiry of fixed
periods not exceeding one hundred and eighty days];
1[(4A) the making to any State Financial Corporation 2[* * *], of
loans and advances repayable on the expiry of fixed periods not
exceeding eighteen months from the date of such loan or advance,
against securities of the Central Government or of any State
Government, of any maturity, or against bonds and debentures
issued by that Corporation and guaranteed by the State
Government concerned and maturing within a period not
exceeding eighteen months from the date of such loan or advance:

3[Provided that the previous approval of the State Government

shall be obtained for the borrowing by the State Financial
Corporation and the amount of loans and advances granted to
that Corporation under this clause shall not, at any time,
exceed in the aggregate 4[twice the paid up share capital]
thereof];

5[(4AA) the making of annual contributions to the National Rural

Credit (Long Term Operations) Fund and the National Rural
Credit] (Stabilization) Fund established under sections 42 and 43,
respectively, of the National Bank for Agriculture and Rural
Development Act, 1981;]

6[(4B) the making to the Industrial Finance Corporation of India

7[* * *] of loans and advances, –

(a)repayable on demand or on the expiry of fixed periods not

exceeding ninety days from the date of such loan or advance,
against securities of the Central Government or of any State
219 | P a g e
M.COM- 4th Semester
Government; or

(b) repayable on the expiry of fixed periods not exceeding

eighteen months from the date of such loan or advance, against
securities of the Central Government of any maturity or against
bonds and debentures issued by the said Corporation and
guaranteed by the Central Government and maturing within a
period not exceeding eighteen months from the date of such
loan or advance:

8[* * * * *]

9[(4BB) the making to any financial institution notified by the

Central Government in this behalf, of loans and advances, –
(a) repayable on demand or on the expiry of fixed periods not
exceeding ninety days from the date of such loan or advance,
against the securities of the Central Government or of any State
Government, or

(b) repayable on the expiry of fixed periods not exceeding

eighteen months from the date of such loan or advance, against
securities of the Central Government or of any State
Government, of any maturity, or against bonds and debentures
issued by that financial institution and guaranteed by the
Central Government or any State Government, and maturing
within a period not exceeding eighteen months from the date
of such loan or advance:

Provided that the amount of loans and advances granted to

a financial institution under sub-clause (b) shall not, at any
time, exceed in the aggregate sixty per cent, of the paid-up
share capital thereof];

1[(4BBB) the making to the Unit Trust of loans and advances -

repayable on demand or on the expiry of a fixed period not

(i)
exceeding ninety days from the date of such loan or advance
against the security of stocks, funds and securities (other than
immovable property) in which a trustee is authorised to invest
220 | P a g e
M.COM- 4th Semester
trust money by any law for the time being in force in India; 2[*
**]

repayable on demand or within a period of eighteen months

(ii)
from the date of such loan or advance against the security of
the bonds of the Unit Trust issued with the approval of and
guaranteed by the Central Government];

3[(iii) for the purpose of any scheme other than the first unit
scheme under the Unit Trust of India Act, 1963 on such terms
and conditions and against the security of such other property
of the Unit Trust as may be specified in this behalf by the
Bank]];

4[(4C) the making to a Warehousing Corporation established

under the Agricultural Produce (Development and Warehousing)
Corporations Act, 1956, of loans and advances, –

(a)repayable on demand or on the expiry of fixed periods not

exceeding ninety days, from the date of such loan or advance,
against securities of the Central Government or of any State
Government, or

(b) repayable on the expiry of fixed periods not exceeding

eighteen months from the date of such loan or advance, against
securities of the Central Government or of any State
Government, of any maturity, or
against bonds and debentures issued by the Corporation to
which the loan or advance is made, and guaranteed by the
Central or a State Government, and maturing within a period
not exceeding eighteen months from the date of such loan or
advance:

Provided that the amount of loans and advances granted

under clause
(b) shall not at any time exceed, in the aggregate, three
crores of rupees in the case of the Central Warehousing
Corporation and fifty lakhs of rupees in the case of a State
Warehousing Corporation];
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1[(4D) the making to the Deposit Insurance Corporation of loans

and advances; and generally assisting the Corporation in such
manner and on such terms as may be determined by the Central
Board];

2[(4DD) the making to the National Housing Bank of loans and

advances and generally assisting the National Housing Bank in
such manner and on such terms as may be determined by the
Central Board];

3[(4E) the making to the National Bank of loans and advances

repayable on demand or on the expiry of fixed period not
exceeding eighteen months from the date of making of the loan or
advance, either-

(i)against the security of stocks, funds and securities (other

than immovable property) in which a trustee is authorised to
invest trust money by any law for the time being in force in
India; or

(ii) on such other terms and conditions as the Bank may specify];

4[(4F) contributing to the initial capital of the Unit Trust];

5[(4G) the making of loans and advances to, and the purchasing of
bonds and debentures of, 6[****] 7[the Exim Bank] 8[or the
Reconstruction Bank] 9[or the Small Industries Bank] out of the
National Industrial Credit (Long Term Operations) Fund
established under section 46C;
1[(4GG) the making of loans and advances to, and the purchasing
of bonds and debentures of, the National Housing Bank out of the
National Housing Credit (Long Term Operations) Fund
established under section 46D];

(4H) the making to 2[*****] 3[the Small Industries Bank] of loans

and advances -

222 | P a g e
M.COM- 4th Semester
(a)repayable on demand or on the expiry of fixed periods not
exceeding ninety days, from the date of such loan or advance
against the security of stocks, funds and securities (other than
immovable property) in which a trustee is authorised to invest
trust money by any law for the time being in force in India;or

(b)against the security of bills of exchange or promissory

notes, arising out of bona fide commercial or trade transactions
bearing two or more good signatures and maturing within five
years from the date of such loan or advance];

4[(4-I) the making to scheduled banks, 5[****] 6[the Exim Bank]

7[or the Reconstruction Bank or the Small Industries Bank], the

Industrial Finance Corporation and any other financial institution

as may, on the recommendation of the Bank, be approved in this
behalf by the Central Government of loans and advances
repayable on demand or otherwise and against such security and
on such other terms and conditions as may be approved in this
behalf by the Central Board for the purpose of enabling such
banks, or financial institution, as the case may be, to purchase
foreign exchange from the Bank for the purpose of financing the
import of capital goods or for such other purposes as may be
approved by the Central Government];

8[(4J) the making to the Exim Bank of loans and advances –

(a)repayable on demand or on the expiry of a fixed period not

exceeding ninety days, from the date of such loan or advance
against the security of stocks, funds and securities (other than
immovable property) in which a trustee is authorised to invest
trust money by any law for the time being in force in India ;or
(b)against the security of bills of exchange or promissory
notes, arising out of bona fide commercial or trade
transactions bearing two or more good signatures and
maturing within five years from the date of such loan
oradvance;]

1[(4K) the making to the Reconstruction Bank of loans and

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M.COM- 4th Semester
advances –

(a)repayable on demand or on the expiry of a fixed period not

exceeding ninety days, from the date of such loan or advance
against the security of stocks, funds and securities (other than
immovable property) in which a trustee is authorised to invest
trust money by any law for the time being in force in India; or

(b)against the security of bills of exchange or promissory

notes, arising out of bona fide commercial or trade transactions
bearing two or more good signatures and maturing within five
years from the date of such loan or advance];

(5) the making to the 2[Central Government] 3[4[* * *] 5[and

6[State Governments]] of advances repayable in each case not

later than three months from the date of the making of the
advance;

7[(6) the issue of demand drafts, telegraphic transfers and other

kinds of remittances made payable at its own offices or agencies,
the purchase of telegraphic transfers, and the making, issue and
circulation of bank post bills];

8[(6A) dealing in derivatives, and, with the approval of the

Central Board, in any other financial instrument.

Explanation.-- For the purposes of this clause, "derivative"

means an instrument, to be settled at a future date, whose
value is derived from change in one or a combination of more
than one of the following underlyings, namely:--

(a) interest rate,

(b) price of securities of the Central Government or a State

Government or of such securities of a local authority as may be
specified in this behalf by the Central Government,
(c) price of foreign securities,

(d) foreign exchange rate,

224 | P a g e
M.COM- 4th Semester

(e) index of rates or prices,

(f) credit rating or credit index,

(g) price of gold or silver coins, or gold or silver bullion, or

(h) any other variable of similar nature.]

1[* * * * * * *]

(8) the Purchase and sale of securities 2[of the Central

3[Government or a4[State] Government]] of any maturity or of

such securities of a local authority 5[* * *] as may be specified in

this behalf by the 6[Central Government] on the recommendation
of the Central Board:

Provided that securities fully guaranteed as to principal and

interest by 7[any such Government 8[or authority]] shall be
deemed for the purposes of this clause to be securities of such
government 9[or authority];
10[* * * * * * *]

11[(8A) the purchase and sale of shares in, or the capital of 12[the
13[National Bank] 14[the Deposit Insurance Corporation], 15[*****],

the State Bank1[or

any other bank 2[or financial institution] notified by the Central
Government in this behalf]];

3[(8AA) the promoting, establishing, supporting or aiding in the

promotion, establishment and support of any financial institution,
whether as its subsidiary or otherwise;]

4[(8B) the keeping of deposits with the State Bank for such
specific purposes as may be approved by the Central Government
in this behalf];

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(9) the custody of monies, securities and other articles of value,
and the collection of the proceeds, whether principal, interest or
dividends, of any such securities;

the sale and realization of all property, whether movable or

(10)
immovable, which may in any way come into the possession of the
Bank in satisfaction, or part satisfaction, of any of its claims;

(11) the acting as agent for 5[* * *] the 6[Central Government] 7[or
any8[State] Government 9[* * *] or any local authority 10[* * *]
11[or the Industrial Finance Corporation of India 12[* * *] 13[or any

other body corporate which is established or constituted by or

under any other law] 14[or the Government of any such country
outside India or 15[any such person or authority] as may be
approved in this behalf by the Central Government] in the
transaction of any of the following kinds of business, namely;–

(a) the purchase and sale of gold or silver 16[or foreign

exchange];
(a) the purchase, sale, transfer and custody of bills of exchange,
securities or shares in any company;

(b) the collection of the proceeds, whether principal, interest or

dividends, of any securities or shares:

(c) the remittance of such proceeds, at the risk of the principal,

by bills of exchange payable either in India or elsewhere;

(d) the management of public debt;

1[(f)2[* * *] the issue and management of 3[* * *] bonds and

debentures];

4[(11A) the acting as agent for the Central Government, –

5[(a) in guaranteeing the due performance by any small scale

industrial concern, approved by the Central Government, of its
obligations to any bank or other financial institution in respect
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of loans and advances made, or other credit facilities provided,
to it by such bank or other financial institution and the making
as such agent of payments in connection with such guarantee,
and

(b) in administering any scheme for subsidizing the rate of

interest or other charges in relation to any loans or advances
made, or other credit facilities provided, by banks or other
financial institutions for the purpose of financing or facilitating
any export from India and the making as such agent of
payments on behalf of the Central Government;]

6[(12) the purchase and sale of gold or silver coins and gold and
silver bullion and foreign exchange and the opening of a gold
account with the principal currency authority of any foreign
country or the Bank for International Settlements or any
international or regional bank or financial institution formed by
such principal currency authority or authorities or by the
Government of any foreign country;]

7[(12A) the purchase and sale of securities issued by the

Government of any country outside India or by any institution or
body corporate established outside India and expressed to be
payable in a foreign currency or any
international or composite currency unit, being in the case of
purchase by the Bank securities maturing within a period of ten
years from the date of purchase:

Provided that in the case of securities of an institution or body

corporate, the repayment of principal and payment of interest
in respect of such securities shall be guaranteed by the
Government of the country concerned];

1[(12AA) lending or borrowing of securities of the Central

Government or a State Government or of such securities of a local
authority as may be specified in this behalf by the Central
Government or foreign securities;

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(12AB) dealing in repo or reverse repo:

Provided that lending or borrowing of funds by way of repo or

reverse repo shall not be subject to any limitation contained in
this section.

Explanation.-- For the purposes of this clause,--

(a) "repo" means an instrument for borrowing funds by selling

securities of the Central Government or a State Government or
of such securities of a local authority as may be specified in this
behalf by the Central Government or foreign securities, with an
agreement to repurchase the said securities on a mutually
agreed future date at an agreed price which includes interest
for the funds borrowed;

(b) "reverse repo" means an instrument for lending funds by

purchasing securities of the Central Government or a State
Government or of such securities of a local authority as may be
specified in this behalf by the Central Government or foreign
securities, with an agreement to resell the said securities on a
mutually agreed future date at an agreed price which includes
interest for the fund slent.]

2[(12B) the making of loans and advances in foreign currencies to

scheduled banks, 3[****] 4[the Exim Bank], 5[the Reconstruction
Bank or the Small Industries Bank], the Industrial Finance
Corporation, any State Financial Corporation and any other
financial institution as may, on the recommendation of the Bank,
be approved by the Central Government and on such terms and
conditions as may be specified by the Central Board in this behalf,
against promissory notes of such bank or financial institution, as
the case maybe:

Provided that the borrowing bank or financial institution, as

the case may be, furnishes a declaration in writing to the effect
that –

(a) it has made loans and advances in foreign currencies for

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financing international trade or for the import of capital goods
or for such other purposes as may be approved by the Central
Government; and

(b)that the amount of loans or advances so made and

outstanding at any time will not be less than the outstanding
amount of the loans or advances obtained by it from the
Bank;]

1[(13) the opening of an account with an office outside India of

any bank, including a bank incorporated in India or the making of
an agency agreement with, and the acting as an agent or
correspondent of, any bank incorporated outside India, or the
principal currency authority of any country under the law for the
time being in force in that country or any international or regional
bank or financial institution formed by such principal currency
authorities or foreign governments, and the investing of the funds
of the Bank in the shares and securities of any such international
or regional bank or financial institution or of any other foreign
institution as may be approved by the Central Board in this
behalf];

2[(13A) participation in any arrangement for the clearing and

settlement of any amounts due from, or to, any person or
authority on account of the external trade of India with any other
country or group of countries or of any remittances to, or from,
that country or group of countries, including the advancing, or
receiving, of any amount in any currency in connection therewith,
and, for that purpose, becoming, with the approval of the Central
Government, a member of any international or regional clearing
union of central banks, monetary or other authorities, or being
associated with any such clearing arrangements, or becoming a
member of any body or association formed by central banks,
monetary or other similar authorities, or being associated with
the same in any manner];

(14) the borrowing of money for a period not exceeding one

month for the purposes of the business of the Bank, and the giving
of security for money so borrowed:
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Provided that no money shall be borrowed under this clause

from any person in India 3[* * *] other than a scheduled bank
4[* * *] or from any person outside India 5[* * *] other than a

bank which is the principal currency authority of any country

under the law for the time being in force in that country:
Provided further that the total amount of such borrowing from
persons in India 1[* * *] shall not at any time exceed the
amount of the 1[capital] of the Bank:

2[* * * * *]

(15) the making and issue of bank notes subject to the provisions of
this Act
3[* * *]; 4[* * *]

5[(15A) the exercise of powers and functions and the

performance of duties entrusted to the Bank under this act or
under any other law for the time being in force;]

6[(15B) the providing of facilities for training in banking and for

the promotion of research, where, in the opinion of the Bank, such
provision may facilitate the exercise by the Bank of its powers and
functions, or the discharge of its duties;]

(16) generally, the doing of all such matters and things as may be
incidental to or consequential upon the exercise of its powers or
the discharge of its duties under this Act 7[* **].

18. Power of direct discount.

8[* * *] When, in the opinion of the 9[Bank] 10[* * *], a special

occasion has arisen making it necessary or expedient that action
should be taken 11[under this section] for the purpose of
regulating credit in the interests of Indian 12[*
* *] trade, commerce, industry and agriculture, the Bank may,
notwithstanding any limitation contained in 13[* * *] section 17, –
1[(1) purchase, sell or discount any bill of exchange or

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promissory note though such bill or promissory note is not
eligible for purchase or discount by the Bank under that
section;or]

2[* * * * *]

3[(3) make loans or advances to –

(a) a State co-operative bank, or

(b) on the recommendation of a State co-operative bank, to a

co- operative society registered within the area in which the
State co- operative bank operates, or

(c) any other person,

repayable on demand or on the expiry of fixed periods, not

exceeding ninety days, on such terms and conditions as the
Bank may consider to be sufficient.]

4[* * * * * **]

5[* * * * * **]

6[18A. Validity of loan or advance not to be questioned.

Notwithstanding anything to the contrary contained in any other

law for the time being in force, –

(a)the validity of any loan or advance granted by the Bank in

pursuance of the provisions of this Act shall not be called in
question merely on the ground of non-compliance with the
requirements of such other law as aforesaid or of any
resolution, contract, memorandum, articles of association or
other instrument:

Provided, that nothing in this clause shall render valid any

loan or advance obtained by any company or co-operative
society where such company or co-operative society is not
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empowered by its memorandum to obtain loans or
advances;

(b)where a loan or advance has been granted under clause

(3A) or under clause (3B) of section 17 or a loan or advance
granted under clause (3) of
section18bytheBanktoanypersonhasbeenappliedbysuchperson
,
wholly or in part, in making a loan or advance to any borrowers,
any sum received –

(i)by the borrowing bank on account of bills of exchange in

respect of which the declaration under clause (i) of the
proviso to clause (3A) of section 17 has been furnished or in
repayment or realisation of the outstanding loans and
advances referred to in clause (ii) of the said proviso or in
the proviso to clause (3B) of the said section, or

by the borrowing bank or any other person in

(ii)
repayment or realisation of loans and advances granted to a
borrower out of funds obtained by it or by him from the
Bank under section18,

shall be utilised only for the repayment by the borrowing bank or

other person, as the case may be, of the amounts due to be repaid
by it or by him to the Bank, and shall be held by it or by him in
trust for the Bank, until such time as the amounts are so repaid.]

19. Business which the Bank may not transact.

Save as otherwise provided in sections 17, 18, 1[42] and 45, the
Bank may not –

(1)engage in trade or otherwise have a direct interest in any

commercial, industrial, or other undertaking except such
interest as it may in any way acquire in the course of the
satisfaction of any of its claims:

Provided that all such interests shall be disposed of at the

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earliest possible moment;

2[(2) purchase the shares of any banking company or of any

other company, or grant loans upon the security of any such
shares;]

(3) advance money on mortgage of, or otherwise on the

security of, immovable property or documents of title relating
thereto, or become the owner of immovable property, except
so far as is necessary for its own business premises and
residences for its officers and servants;

(4) make loans or advances;

(5) draw or accept bills payable otherwise than on demand;

(6) allow interest on deposits or current accounts.

CHAPTER III
CENTRAL BANKING
FUNCTIONS

20. Obligation of the Bank to transact Government business.

The Bank shall undertake to accept monies for account of 1[* * *]

the Central Government 2[* * *] and to make payments up to the
amount standing to the credit of 3[its account], and to carry out
4[its exchange], remittance and other banking operations,

including the management of the public debt 5[of the Union].

6[* * * *]

21. Bank to have the right to transact Government business in India.

(1)The 7[Central Government] 8[* * *] shall entrust the Bank, on

such conditions as may be agreed upon, with all 9[its] money,
remittance, exchange and banking transactions in India, and, in
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particular, shall deposit free of interest all 10[its] cash balances
with the Bank:

Provided that nothing in this sub-section shall prevent the

11[Central Government] 12[* * *] from carrying on money

transactions at places where the Bank has no branches or

agencies, and the 13[Central Government] 14[***] may hold at
such places such balances as 15[it] may require.
(2) The 1[Central Government] 2[***] shall entrust the Bank, on
such conditions as may be agreed upon, with the management of
the public debt and with the issue of any new loans.

(3)In the event of any failure to reach agreement on the

conditions referred to in this section the 3[Central Government]
shall decide what the conditions shall be.

4[(4) Any agreement made under this section shall be laid, as soon
as may be after it is made, before Parliament.]

5[* * * *]

6[21A. Bank to transact Government business of States on

agreement.

(1)TheBankmaybyagreementwiththeGovernmentofany7[***]State
8[* * *] undertake–

(a) all its money, remittance, exchange and banking

transactions in India, including in particular, the deposit, free
of interest, of all its cash balances with the Bank; and

the management of the public debt of, and the issue of any
(b)
new loans by, that State.

(2)Any agreement made under this section shall be laid, as soon

as may be after it is made, before Parliament.]

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9[21B. Effect of agreements made between the Bank and certain
States before the 1st November, 1956.

(1)Any agreement made under section 21 or section 21A between

the Bank and the Government of a State specified in the
Explanation below and in force immediately before the 1st day of
November, 1956, shall, as from that day have effect as if it were an
agreement made on that day under section 21A between the Bank
and the Government of the corresponding State subject to
such modifications, if any, being of a character not affecting the
general operation of the agreement, as may be agreed upon
between the Bank and the Government of the corresponding
State, or in default of such agreement, as may be made therein by
order of the Central Government.

Explanation.– In this sub-section ‘‘corresponding State’’

means,–

(a)in relation to the agreement between the Bank and the

State of Andhra, the State of Andhra Pradesh;

(b)in relation to the agreement between the Bank and any

other Part- A State as it existed before the 1st day of
November, 1956, the State with the same name, and

(c)in relation to the agreement between the Bank and the

Part B State of Mysore or Travancore-Cochin as it existed
before the 1st day of November, 1956, the State of Mysore
or Keral a respectively.

(2)Any agreement made under section 21A between the Bank

and the Government of the Part B State of Hyderabad, Madhya
Bharat or Saurashtra shall be deemed to have terminated on the
31st day of October,1956.]

22. Right to issue banknotes.

(1) The Bank shall have the sole right to issue bank notes in
1[India], and may, for a period which shall be fixed by the

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2[Central Government] on the recommendation of the Central
Board, issue currency notes of the Government of India supplied
to it by the 3[Central Government], and the provisions of this Act
applicable to bank notes shall, unless a contrary intention
appears, apply to all currency notes of the Government of India
issued either by the 4[Central Government] or by the Bank in like
manner as if such currency notes were bank notes, and references
in this Act to bank notes shall be construed accordingly.

(2)On and from the date on which this Chapter comes into force the
5[Central Government] shall not issue any currency notes.

23. Issue Department.

(1) The issue of bank notes shall be conducted by the Bank in an

Issue Department which shall be separated and kept wholly
distinct from the Banking Department, and the assets of the Issue
Department shall not be subject to any liability other than the
liabilities of the Issue Department as hereinafter defined in
section34.
(2) The Issue Department shall not issue bank notes to the
Banking Department or to any other person except in exchange
for other bank notes or for such coin, bullion or securities as are
permitted by this Act to form part of the Reserve.

1[* * * * *]

2[24. Denominations of notes.

(1)Subject to the provisions of sub-section (2), bank notes shall

be of the denominational values of two rupees, five rupees, ten
rupees, twenty rupees, fifty rupees, one hundred rupees, five
hundred rupees, one thousand rupees, five thousand rupees and
ten thousand rupees or of such other denominational values, not
exceeding ten thousand rupees, as the Central Government may,
on the recommendation of the Central Board, specify in this
behalf.

(2) The Central Government may, on the recommendation of the

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Central Board, direct the non-issue or the discontinuance of issue
of bank notes of such denominational values as it may specify in
this behalf.]

25. Form of banknotes.

The design, form and material of bank notes shall be such as may
be approved by the 3[Central Government] after consideration of
the recommendations made by Central Board.

26. Legal tender character of notes.

(1)Subject to the provisions of sub-section (2), every bank note

shall be legal tender at any place in 4[India] in payment or on
account for the amount expressed therein, and shall be
guaranteed by the 5[Central Government].

(2)On recommendation of the Central Board the 6[Central

Government] may, by notification in the Gazette of India, declare
that, with effect from such date as may be specified in the
notification, any series of bank notes of any denomination shall
cease to be legal tender 7[save at such office or agency of the Bank
and to such extent as may be specified in the notification].

1[* * * * *]

2[26A. Certain bank notes to cease to be legal tender.

Notwithstanding anything contained in section 26, no bank note

of the denominational value of five hundred rupees, one thousand
rupees or ten thousand rupees issued before the 13th day of
January, 1946, shall be legal tender in payment or on account for
the amount expressed therein.]

27. Re-issue of notes.

The Bank shall not re-issue bank notes which are torn, defaced or
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excessively soiled.

28. Recovery of notes lost, stolen, mutilated or imperfect.

3[* * *] Notwithstanding anything contained in any enactment or

rule of law to the contrary, no person shall of right be entitled to
recover from the 4[Central Government] or the Bank, the value of
any lost, stolen, mutilated or imperfect currency note of the
Government of India or bank note:

Provided that the Bank may, with the previous sanction of the
5[Central Government], prescribe the circumstances in and the

conditions and limitations subject to which the value of such

currency notes or bank notes may be refunded as of grace and
the rules made under this proviso shall be laid on the table 6[* *
*] of7[Parliament].
8[* * * * *]

9[28A. Issue of special bank notes and special one rupee notes in
certain cases.

(1) For the purpose of controlling the circulation of bank notes

without India, the Bank may, notwithstanding anything contained
in any other provision of this Act, issue bank notes of such design,
form and material as may be approved under sub-section (3)
(hereinafter in this section referred to as special bank notes) of
the denominational values of five rupees, ten rupees and one
hundred rupees.

(2)For the purpose of controlling the circulation of Government of

India one rupee notes without India, the Central Government may,
notwithstanding anything contained in any other provision of this
Act or in the Currency Ordinance, 1940, issue Government of India
notes of the denominational value of one rupee of such design,
form and material as may be adopted under sub-section (3)
(hereinafter in this section referred to as special one rupees
notes).

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(3)The design, form and material of the special bank notes shall
be such as may be approved by the Central Government after
consideration of the recommendations made by the Governor and
of the special one rupee notes shall be such as the Central
Government may think fit to adopt.

(4)Neither the special bank notes nor the special one rupee notes
shall be legal tender in India.

(5) The special one rupee note shall be deemed to be included in

the expression ‘‘rupee coin’’ for all the purposes of this Act except
section 39, but shall be deemed not to be a currency note for any
of the purposes of this Act.

(6)Where a special bank note is on its face expressed to be

payable at a specified office or branch of the Bank, the obligation
imposed by section 39 shall be only on the specified office or
branch and, further, shall be subject to such regulations as may be
made under this section.

(7) The Bank may, with the previous sanction of the Central
Government, make regulations to provide for all matters for
which provision is necessary or convenient for the purpose of
giving effect to the provisions of this section, and, in particular,
the manner in which, and the conditions or limitations subject to
which–

bank notes and one rupee notes in circulation in any

(i)
country outside India may be replaced by special notes issued
under this section;

any such special notes may be exchanged for any other bank
(ii)
notes or one rupee notes].

29. Bank exempt from stamp duty on banknotes.

The Bank shall not be liable to the payment of any stamp duty
under the Indian Stamp Act, 1899, in respect of bank notes 1[* * *]
issued by it.

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30. Powers of Central Government to supersede Central Board.

If in the opinion of the 1[Central Government] the Bank fails to carry out any
of the obligations imposed on it by or under this Act 2[* * *] 3[the Central
Government] may, by notification in the Gazette of India, declare the Central
Board to be superseded, and thereafter the general superintendence and
direction of the affairs of the Bank shall be entrusted to such agency as the
4[Central Government] may determine, and such agency may exercise the

powers and do all acts and things which may be exercised or done by the
Central Board under this Act.

(1)When action is taken under this section the 5[Central

Government] shall cause a full report of the circumstances leading
to such action and of the action taken to be laid before
6[Parliament] at the earliest possible opportunity and in any case

within three months from the issue of the notification superseding

the Board.

31. Issue of demand bills and notes.

7[(1)] No person in 8[India] other than the Bank or, as expressly

authorized by this Act, the 9[Central Government] shall draw,
accept, make or issue any bill of exchange, hundi, promissory note
or engagement for the payment of money payable to bearer on
demand, or borrow, owe or take up any sum or sums of money on
the bills, hundis or notes payable to bearer on demand of any such
person:

Provided that cheques or drafts, including hundis, payable to

bearer on demand or otherwise may be drawn on a person’s
account with a banker, shroff or agent.

10[(2) notwithstanding anything contained in the Negotiable

Instruments Act, 1881, no person in 11[India] other than the Bank
or, as expressly authorised by this Act, the Central Government
shall make or issue any promissory note expressed to be payable
to the bearer of the instrument.]

32. [Penalty.]
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[Rep. by the Reserve Bank of India [Amendment] Act, 1974 (51 of
1974), S. 9.]

33. Assets of the Issue Department.

(1) The assets of the Issue Department shall consist of gold coin,
gold bullion,1[foreign securities], rupee coin and rupee securities
to such aggregate amount as is not less than the total of the
liabilities of the Issue Department as here in after defined.

2[(2) The aggregate value of the gold coin, gold bullion and
foreign securities held as assets and the aggregate value of the
gold coin and gold bullion so held shall not at any time be less
than two hundred crores of rupees and one hundred and fifteen
crores of rupees, respectively.]

3[(3) The remainder of the assets shall be held in rupee coin,

Government of India rupee securities of any maturity, promissory
notes drawn by the National Bank for any loans or advances
under clause (4E) of section 17 and such bills of exchange and
promissory notes payable in India as are eligible for purchase by
the Bank under sub-clause (a) or sub-clause (b) or sub- clause
(bb) of clause (2) of section 17 or under clause (1) of section18.]

(4) For the purposes of this section, gold coin and gold bullion
shall be valued at 4[a price not exceeding the international market
price for the time being obtaining], rupee coin shall be valued at
its face value, and securities shall be valued 5[at rates not
exceeding the market rates] for the time being obtaining.

(5)Of the gold coin and gold bullion held as assets, not less than
seventeen- twentieths shall be held in 6[India], and all gold coin
and gold bullion held as assets shall be held in the custody of the
Bank or its agencies;

Provided that gold belonging to the Bank which is in any other

bank or in any mint or treasury or in transit may be reckoned
as part of the assets.
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7[(6) For the purposes of this section, the foreign securities which
may be held as part of the assets shall be–

securities of the following kinds payable in the currency of

(i)
any foreign country which is a member of the International
Monetary Fund, namely:–

(a)balances with the bank which is the principal currency

authority of that foreign country and any other balances or
securities in foreign
currency maintained with or issued by the International
Monetary Fund, the International Bank for Reconstruction
and Development, the International Development
Association or the International Finance Corporation 1[or
Asian Development Bank] or the Bank for International
Settlements or 2[any banking or financial institution
3[approved] by the Central Government] in this behalf,
provided that they are repayable within a 4[period of ten
years];

(b)bills of exchange bearing two or more good signatures

and drawn on and payable at any place in that foreign
country and having a maturity not exceeding ninety days;
and

(c) Government securities of that foreign country maturing

5[within ten years];

(ii)any drawing rights representing a liability of the

International Monetary Fund.]

34. Liabilities of the Issue Department.

(1) The liabilities of the Issue Department shall be an amount

equal to the total of the amount of the currency notes of the
Government of India and bank notes for the time being in
circulation.

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6[* * * **]

7[* * * **]

35. [Initial assets and liabilities.]

[Rep. by Act 62 of 1948. s. 7 and Sch.(w.e.f. 1-1-1949).]

36. [Method of dealing with fluctuations in rupee coin assets.]

[Rep. by Act 55 of 1963, s. 3 (w.e.f. 1-2-1964).]

8[37. Suspension of assets requirements as to foreign securities.

Notwithstanding anything contained in the foregoing provisions,
the Bank may, with the previous sanction of the Central
Government, for periods not exceeding six months in the first
instance, which may, with the like sanction, be extended from
time to time by periods not exceeding three months at a time, hold
as assets foreign securities of less amount in value than that
required by sub-section (2) of section33.

1[* * * * *]

38. Obligations of Government and the Bank in respect of rupee coin.

The 2[Central Government] shall undertake not 3[* * *] to put into

circulation any rupees, except through the Bank 4[** *]; and the
Bank shall undertake not to dispose of rupee coin otherwise than
for the purposes of circulation 5[*
* *].

39. Obligation to supply different forms of currency.

(1)The Bank shall issue rupee coin on demand in exchange for

bank notes and currency notes of the Government of India, and

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shall issue currency notes or bank notes on demand in exchange
for coin which is legal tender under the Indian Coinage Act,1906.

(2) The Bank shall, in exchange for currency notes or bank notes
of 6[two]
rupees or upwards, supply currency notes or bank notes
of lower value or other coins which are legal tender under the
Indian Coinage Act, 1906, in such quantities as may, in the opinion
of the Bank, be required for circulation; and the 7[Central
Government] shall supply such coins to the Bank on demand. If
the 8[Central Government] at any time fails to supply such coins,
the Bank shall be released from its obligations to supply them to
the public.

9[40. Transactions in foreign exchange.

The Bank shall sell to or buy from any authorised person who
makes a demand in that behalf at its office in Bombay, Calcutta,
Delhi or Madras 10[or at such of its branches as the Central
Government may, by order, determine],
foreign exchange at such rates of exchange and on such conditions
as the Central Government may from time to time by general or
special order determine, having regard so far as rates of exchange
are concerned to its obligations to the International Monetary
Fund:

Provided that no person shall be entitled to demand to buy or

sell foreign exchange of a value less than two lakhs of rupees.

Explanation.– In this section ‘‘authorised person’’ means a person

who is entitled by or under the 1[Foreign Exchange Regulation
Act, 1973], to buy, or as the case may be, sell, the foreign exchange
to which his demand relates.]

41. [Obligation to buy sterling]

[Rep. by Act 23 of 1947, s. 4 (w.e.f. 18-4-1947).

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2[41A. [Obligation to provide remittance between India and Burma.]

[Rep. by Act 11 of 1947, s. 22 (w.e.f. 1-4-1947).

42. Cash reserves of scheduled banks to be kept with the Bank.

3[(1) Every bank included in the Second Schedule shall maintain

with the Bank an average daily balance the amount of which shall
not be less than 4[such per cent. of the total of the demand and
time liabilities in India of such bank as shown in the return
referred to in sub-section (2), as the Bank may from time to time,
having regard to the needs of securing the monetary stability in
the country, notify in the Gazette of India]:

5[Provided that the Bank may, by notification in the Gazette of

India, increase the said rate to such higher rate as may be
specified in the notification so however that the rate shall not
be more than 6[twenty per cent] of the total of the demand and
time liabilities.]

Explanation.– For the purposes of this section,–

(a) ‘‘average daily balance’’ shall mean the average of the

balances held at the close of business on each day 7[of a
fortnight];
1[(b) ‘‘fortnight’’ shall mean the period from Saturday to the
second following Friday, both days inclusive;]

2[(c) ‘‘liabilities’’ shall not include –

(i) the paid-up capital or the reserves or any credit balance

in the profit and loss account of the bank;

(ii) the amount of any loan taken from the Bank 3[****] 4[or
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from the Exim Bank] 5[or from the Reconstruction Bank]
6[or from the National Housing Bank] or from the 7[National

Bank] 8[* * *] or 9[from the Small Industries Bank].

(iii)in the case of a State co-operative bank, also any loan

taken by such bank from a State Government 10[or from the
National Co- operative Development Corporation
established under the National Co- operative Development
Corporation Act, 1962] and any deposit of money with such
bank representing the reserve fund or any part thereof 11[*
* *] maintained with it by any co-operative society within its
area of operation;]

12[(iv) in the case of a State co-operative bank, which has

granted an advance against any balance maintained with it,
such balance to the extent of the amount outstanding in
respect of such advance;]

13[(v) in the case of a Regional Rural Bank, also any loan

taken by such bank from its Sponsor Bank;]

14[(d) the aggregate of the ‘‘liabilities’’ of a scheduled bank

which is not a State co-operative bank, to,–
(i) the State Bank;

a subsidiary bank as defined in section 2 of the State

(ii)
Bank of India (Subsidiary Banks) Act,1959;

a corresponding new bank constituted by section 3 of

(iii)
the Banking Companies (Acquisition and Transfer of
Undertakings) Act,1970:

1[(iiia) a corresponding new bank constituted by section 3

of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980;]

(iv)a banking company as defined in clause (c) of section 5

of the Banking Regulation Act,1949;
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(v) a co-operative bank; or

(vi)any other financial institution notified by the Central

Government in this behalf, shall be reduced by the
aggregate of the liabilities of all such banks and institutions
to the scheduled bank;

(e) the aggregate of the ‘‘liabilities’’ of a scheduled bank which

is a State co-operative bank, to,–

(i) the State Bank;

a subsidiary bank as defined in section 2 of the State

(ii)
Bank of India (Subsidiary Banks) Act,1959;

a corresponding new bank constituted by section 3 of

(iii)
the Banking Companies (Acquisition and Transfer of
Undertakings) Act,1970;

2[(iiia) a corresponding new bank constituted by section 3

of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980:]

(iv)a banking company as defined in clause (c) of section 5

of the Banking Regulation Act, 1949;or

(v) any other financial institution notified by the Central

Government in this behalf, shall be reduced by the
aggregate of the liabilities of all such banks and institutions
to the State Co-operative bank.]

(1A) Notwithstanding anything contained in sub-section (1), the

Bank may, by notification in the Gazette of India, direct that every
scheduled bank shall, with effect from such date as may be
specified in the notification, maintain with the Bank, in addition to
the balance prescribed by or under sub-section (1), an additional
average daily balance the amount of which shall not be less
than the 1[rate specified in the notification, such additional
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balance being calculated with reference to the excess of the total
of the demand and time liabilities of the bank as shown in the
return referred to in sub-section (2) over the total of its demand
and time liabilities] at the close of business on the date specified
in the notification as shown by such return so however, that the
additional balance shall, in no case, be more than such excess:

2[Provided that the Bank may, by a separate notification in the

Gazette of India, specify different dates in respect of a bank
subsequently, included in the Second Schedule.]

3[****]

4[(1C) The Bank may, for the purposes of this section, specify
from time to time with reference to any transaction or class of
transactions that such transaction or transactions shall be
regarded as liability in India of a scheduled bank, and if any
question arises as to whether any transaction or class of
transactions shall be regarded, for the purposes of this section, as
liability in India of a schedule bank, the decision of the Bank
thereon shall be final.]

5[(2) Every scheduled bank shall send to the Bank a return signed
by two responsible officers of such bank showing–

the amount of its demand and time liabilities and the

(a)
amount of its borrowings from banks in India 1[classifying
them into demand and time liabilities],
3 Sub-sections(1AA) and (1B) omitted by Act 26 of 2006, s. 3.
Before omission, sub-sections (1AA) and (1B) stood as under:

[(1AA) Notwithstanding anything contained in sub-section (1) or

subsection (1A), it shall not be necessary for any scheduled bank to
maintain with the Bank any balance which shall be more than
3[twenty per cent] of the total of its demand and time liabilities as
shown in the return referred to in sub-section (2).]

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(1B) Where any scheduled bank maintains, in pursuance of a
notification issued under the proviso to sub-section (1) or under
sub-section (1A), any balance with the Bank the amount of which is
not less than that required to be maintained by such notification,
the Bank may pay to the scheduled bank interest at such rate or
rates as may be determined by the Bank from time to time on the
amount by which such balance actually maintained is in excess of
the balance which the scheduled bank would have to maintain, if no
such notification was issued:

Provided that no interest shall be payable on any such amount

actually maintained as is in excess of the balance required to be
maintained by or under sub-section (1) or under sub-section (1A).]

Provided further that where the Bank does not, under sub-section
(5), demand the payment of the penalty imposed by sub-section (3),
it may pay interest at such rate or rates as may be determined by
the Bank from time to time on the amount actually maintained with
it by the scheduled bank, notwithstanding that such amount is less
than the balance required to be maintained in pursuance of a
notification issued under the proviso to sub-section (1) or under
sub-section (1A).]

2[* * * * *]

(b) the total amount of legal tender notes and coins held by it in
India,

(c) the balance held by it at the Bank in India,

(d)the balances held by it at other banks in current account

and the money at call and short notice in India.,

(e)the investments (at book value) in Central and State

Government securities including treasury bills and treasury
deposit receipts,

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(f) the amount of advances in India,

(g) the inland bills purchased and discounted in India 3[and

foreign bills purchased and discounted], 4[at the close of
business on each alternate Friday, and every such return shall
be sent not later than seven days after the date to which it
relates]:

5[Provided that the Bank may, by notification in the Gazette

of India, delete or modify or add to any of the particulars
specified in the foregoing clauses:

Provided further that where 6[such alternate] Friday is a

public holiday under the Negotiable Instruments Act, 1881,
for one or more offices of a scheduled bank, the return shall
give the preceding working day’s figures in respect of such
office or offices, but shall nevertheless be deemed to relate
to that Friday:

7[Provided also that where the Bank is satisfied that the

furnishing of a fortnightly return under this sub-section is
impracticable in the case of any scheduled bank by reason
of the geographical position of the bank and its branches,
the Bank may allow such bank –

(i)to furnish a provisional return for the fortnight within

the period aforesaid to be followed by a final return not
later than twenty days after the date to which it relates,
or

to furnish in lieu of a fortnightly return a monthly

(ii)
return to be sent not later than twenty days after the end
of the month to which it relates giving the details
specified in this sub-section in respect of such bank at
the close of business for the month.]

1[(2A) Where the last Friday of a month is not an alternate Friday

for the purpose of sub-section (2), every scheduled bank shall
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send to the Bank, a special return giving the details specified in
sub-section (2) as at the close of business on such last Friday or
where such last Friday is a public holiday under the Negotiable
Instruments Act, 1881 as at the close of business on the preceding
working day and such return shall be sent not later than seven
days after the date to which it relates.]

2[(3) If the average daily balance held at the Bank by a scheduled

bank during any 3[fortnight] is below the minimum prescribed by
or under sub- section (1) or sub-section (1A), such Scheduled
bank shall be liable to pay to the Bank in respect of that
4[fortnight] penal interest at a rate of three per cent, above the

bank rate on the amount by which such balance with the Bank
falls short of the prescribed minimum, and if during the next
succeeding 5[fortnight], such average daily balance is still below
the prescribed minimum the rates of penal interest shall be
increased to a rate of five per cent, above the bank rate in respect
of that 6[fortnight) and each subsequent 7[fortnight) during which
the default continues on the amount by which such balance at the
Bank falls short of the prescribed minimum.]

8[(3A) When under the provisions of sub-section (3) penal

interest at the increased rate of five per cent, above the bank rate
has become payable by a scheduled bank, 9[if thereafter the
average daily balance held at the Bank during the next succeeding
10[fortnight] is still below the prescribed minimum.

(a)every director, manager or secretary of the scheduled bank,

who is knowingly and wilfully a party to the default, shall be
punishable with fine which may extend to five hundred rupees
and with a further fine which may extend to five hundred
rupees for each subsequent 11[fortnight] during which the
default continues, and
(b) the Bank may prohibit the scheduled bank from receiving
after the said 1[fortnight] any fresh deposit,]

and, if default is made by the scheduled bank in complying with

the prohibition referred to in clause (b), every director and officer
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of the scheduled bank who is knowingly and wilfully a party to
such default or who through negligence or otherwise contributes
to such default shall in respect of each such default be punishable
with fine which may extend to five hundred rupees and with a
further fine which may extend to five hundred rupees for each day
after the first on which a deposit received in contravention of such
prohibition is retained by the scheduled bank.

Explanation.– In this sub-section ‘‘officer’’ includes a 2[* * *]

manager, secretary, branch manager, and branch secretary.]

(4) Any scheduled bank failing to comply with the provisions of

subsection (2)3[shall be liable to pay to the Bank] a penalty of one
hundred rupees for each day during which the failure continues.

4[(5) (a) The penalties imposed by sub-sections (3) and (4) shall
be payable within a period of fourteen days from the date on
which a notice issued by the Bank demanding the payment of the
same is served on the scheduled bank, and in the event of a failure
of the scheduled bank to pay the same within such period, may be
levied by a direction of the principal civil court having jurisdiction
in the area where an office of the defaulting bank is situated, such
direction to be made only upon an application made in this behalf
to the court by the Bank;

(b) when the court makes a direction under clause (a), it shall
issue a certificate specifying the sum payable by the scheduled
bank and every such certificate shall be enforceable in the
same manner as if it were a decree made by the court in a suit;

(c) not with standing anything contained in this section, if the

Bank is satisfied that the defaulting bank had sufficient cause
for its failure to comply with the provisions of sub-sections (1),
(1A) or (2), it may not demand the payment of the penal
interest or the penalty, as the case may be.]

5[(6) The Bank shall, save as hereinafter provided, by notification

in the Gazette of India,–

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(a) direct the inclusion in the Second Schedule of any bank not
already so included which carries on the business of banking
1[in India] and which–

(i)has a paid-up capital and reserves of an aggregate value

of not less than five lakhs of rupees, and

(ii)satisfies the Bank that its affairs are not being conducted
in a manner detrimental to the interests of its depositors,
and

(iii)2[is a State co-operative bank or a company] as defined

in3[section 3 of the Companies Act, 1956, or an institution
notified by the Central Government in this behalf] or a
corporation or a company incorporated by or under any law
in force in any place4[outside India];

(b) direct the exclusion from that Schedule of any scheduled

bank.–

the aggregate value of whose paid-up capital and reserves

(i)
becomes at any time less than five lakhs of rupees, or

(ii)which is, in the opinion of the Bank after making an

inspection under section 35 of the 5[Banking Regulation Act,
1949], conducting its affairs to the detriment of the interests of
its depositors, or

which goes into liquidation or otherwise ceases to carry on

(iii)
banking business:

Provided that the Bank may, on application of the scheduled

bank concerned and subject to such conditions, if any, as it
may impose, defer the making of a direction under sub-
clause (i) or sub-clause (ii) of clause (b) for such period as
the Bank considers reasonable to give the scheduled bank
an opportunity of increasing the aggregate value of its paid-
up capital and reserves to not less than five lakhs of rupees
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or, as the case may be, of removing the defects in the
conduct of its affairs:

(c)alter the description in that Schedule whenever any

scheduled bank changes its name.

Explanation.– In this sub-section the expression ‘‘value’’

means the real or exchangeable value and not the nominal
value which may be shown in the books of the bank
concerned; and if any dispute arises in computing the
aggregate value of the paid-up capital and reserves of a
bank, a determination thereof by the Bank shall be final for
the purposes of this sub-section.]

1[(6A) In considering whether a State co-operative bank or a

regional rural bank should be included in or excluded from the
Second Schedule, it shall be competent for the Bank to act on a
certificate from the National Bank on the question whether or not
a State co-operative bank or a regional rural bank, as the case may
be, satisfies the requirements as to paid-up capital and reserves or
whether its affairs are not being conducted in a manner
detrimental to the interests of its depositors.]

2[(7) The Bank may, for such period and subject to such
conditions as may be specified, grant to any scheduled bank such
exemptions from the provisions of this section as it thinks fit with
reference to all or any of its offices or with reference to the whole
or any part of its assets and liabilities.]

3[43. Publication of consolidated statement by the Bank.

The Bank shall cause to be published each 4[fortnight] a

consolidated statement showing the aggregate liabilities and
assets of all the scheduled banks together, based on the returns
and information received under this Act or any other law for the
time being in force.]

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5[43A. Protection of action taken in good faith.

(1) No suit or other legal proceeding shall lie against the Bank or
any of its officers for anything which is in good faith done or
intended to be done in pursuance of section 42 or section 43 6[or
in pursuance of the provisions of Chapter IIIA].

(2)No suit or other legal proceeding shall lie against the Bank or
any of its officers for any damage caused or likely to be caused by
anything which is in good faith done or intended to be done in
pursuance of section 42 or section 43 7[or in pursuance of the
provisions of Chapter IIIA].]

44. [Power to require returns from co-operative banks.]

[Rep. by the Banking Laws (Application to Co-operative Societies)

Act, 1965 (23 of 1965), s. 7 (w.e.f. 1-3-1966).]

45. Appointment of Agents.

(1) Unless otherwise directed by the Central Government with

reference to any place, the Bank may, having regard to public
interest, convenience of banking, banking development and such
other factors which in its opinion are relevant in this regard,
appoint the National Bank, or the State Bank or a corresponding
new bank constituted under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970, or a
corresponding new bank constituted under section 3 of the
Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980, or any subsidiary bank as defined in the State Bank of
India (Subsidiary Banks) Act, 1959, as its agent at all places, or at
any place in India for such purposes as the Bank may specify.

(2) When any bank is appointed by the Bank a sits agent under sub
section
(1) to receive on behalf of the Bank any payment required to be
made into the Bank, or any bill, hundies or other securities
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required to be delivered into the Bank, under any law or rule,
regulations or other instructions having the force of law, the same
may be paid or delivered into the bank so appointed as the agent
of the Bank.]

2[CHAPTER IIIA

COLLECTION AND FURNISHING OF CREDIT INFORMATION

45A. Definitions.

In this Chapter, unless the context otherwise requires,–

(a)‘‘banking company’’ means a banking company as defined in

section 5 of the 3[Banking Regulation Act, 1949], and includes
the State Bank of India, 4[any subsidiary bank as defined in the
State Bank of India (Subsidiary Banks) Act, 1959, any
corresponding new bank constituted by section 3 of the
Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970, and any other financial institution
notified by the Central Government in this behalf];

(b) ‘‘borrower’’ means any person to whom any credit limit has
been sanctioned by any banking company, whether availed of
or not, and includes–

(i) in the case of a company or corporation, its subsidiaries;

(ii) in the case of a Hindu Undivided Family, any member
thereof or any firm in which such member is a partner;

in the case of a firm, any partner thereof of any other

(iii)
firm in which such partner is a partner; and

(iv)in the case of an individual, any firm in which such

individual is a partner;

(c) ‘‘credit information’’ means any information relating to–

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(i)the amounts and the nature of loans or advances and

other credit facilities granted by a banking company to any
borrower or class of borrowers;

(ii)the nature of security taken from any borrower 1[or

class of borrowers] for credit facilities 2[granted to him or
to such class];

(iii)the guarantee furnished by a banking company for any

of its customers 3[or any class of its customers];
4[(iv) the means, antecedents, history of financial
transactions and the credit worthiness of any borrower or
class of borrowers;

(v) any other information which the Bank may consider to

be relevant for the more orderly regulation of credit or
credit policy.]

45B. Power of Bank to collect credit information.

The Bank may–

(a) collect, in such manner as it may think fit, credit

information from banking companies; and

(b)furnish such information to any banking company in

accordance with the provisions of section45D.

45C. Power to call for returns containing credit information.

(1)For the purpose of enabling the Bank to discharge its functions

under this Chapter, it may at any time direct any banking
company to submit to it such statements relating to such credit
information and in such form and within such time as may be
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specified by the Bank from time to time.

(2) A banking company shall, notwithstanding anything to the

contrary contained in any law for the time being in force or in any
instrument regulating the constitution thereof or in any
agreement executed by it, relating to the secrecy of its dealings
with its constituents, be bound to comply with any direction
issued under sub-section(1).

45D. Procedure for furnishing credit information to banking

companies.

(1)A banking company may, in connection with any financial

arrangement entered into or proposed to be entered into by it,
with any person, make an application to the Bank in such form as
the Bank may specify requesting it to furnish the applicant with
such credit information as may be specified in the application.

(2)On receipt of an application under sub-section (1), the Bank

shall, as soon as may be, furnish the applicant with such credit
information relating to the matters specified in the application, as
may be in its possession:

Provided that the information so furnished shall not disclose

the names of the banking companies which have submitted
such information to the Bank.

(3)The Bank may in respect of each application levy such fees, not
exceeding twenty-five rupees, as it may deem fit for furnishing
credit information.

45E. Disclosure of information prohibited.

(1)Any credit information contained in any statement submitted

by a banking company under section 45C or furnished by the
Bank to any banking company under section 45D, shall be treated
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as confidential and shall not, except for the purposes of this
Chapter, be published or otherwise disclosed.

(2) Nothing in this section shall apply to–

(a)the disclosure by any banking company, with the previous

permission of the Bank, of any information furnished to the
Bank under section45C:

(b)the publication by the Bank, if it considers necessary in the

public interest so to do, of any information collected by it
under section 45C, in such consolidated form as it may think fit
without disclosing the name of any banking company or its
borrowers:

1[(c) the disclosure or publication by the banking company or

by the Bank of any credit information to any other banking
company or in accordance with the practice and usage
customary among bankers or as permitted or required under
any other law:

Provided that any credit information received by a banking

company under this clause shall not be published except in
accordance with the

practice and usage customary among bankers or as

permitted or required under any other law.]

1[(d) the disclosures of any credit information under the

Credit Information Companies (Regulation) Act,2005.]

(3)Notwithstanding anything contained in any law for the time

being in force, no court, tribunal or other authority shall compel
the Bank or any banking company to produce or to give inspection
of any statement submitted by that banking company under
section 45C or to disclose any credit information furnished by the
Bank to that banking company under section45D.

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45F. Certain claims for compensation barred.

No person shall have any right, whether in contract or otherwise,

to any compensation for any loss incurred by reason of the
operation of any of the provisions of this Chapter.

45G. [Penalties.]

[Rep. by the Reserve Bank of India (Amendment) Act,1974 (51 of

1974), s. 15.]

2[CHAPTER IIIB

PROVISIONS RELATING TO NON-BANKING INSTITUTIONS

RECEIVING DEPOSITS AND FINANCIAL INSTITUTIONS

45H. Chapter IIIB not to apply in certain cases.

The provisions of this Chapter shall not apply to the State Bank or
a banking company as defined in section 5 of the 3[Banking
Regulation Act, 1949] or 4[a corresponding new bank as defined
in clause (da) of section 5 of that Act or a subsidiary bank as
defined in the State Bank of India (Subsidiary Banks) Act, 1959] or
5[a Regional Rural Bank or a co-operative bank] or a primary

agricultural credit society or a primary credit society]:

Provided that for the purposes of this Chapter, the 6[Tamil

Nadu Industrial Investment Corporation Limited] shall not be
deemed to be a banking company.

45I. Definitions.

In this Chapter, unless the context otherwise requires,–

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1[(a) ‘‘business of a non-banking financial institution’’ means

carrying on of the business of a financial institution referred to
in clause (c) and includes business of a non-banking financial
company referred to in clause (f);]

2[(aa)] ‘‘company’’ means a company as defined in section 3 of

the Companies Act, 1956 and includes a foreign company
within the meaning of section 591 of that Act:

(b) ‘‘corporation’’ means a corporation incorporated by an Act

of any legislature;

3[(bb) ‘‘deposit’’ includes and shall be deemed always to have

included any receipt of money by way of deposit or loan or in
any other form, but does not include,–

(i) amounts raised by way of share capital;

(ii) amounts contributed as capital by partners of a firm;

amounts received from a scheduled bank or a co-

(iii)
operative bank or any other banking company as defined in
clause (c) of section 5 of the Banking Regulation Act,1949;

(iv) any amount received from,–

4[*****]

(b) a State Financial Corporation,

any financial institution specified in or under section

(c)
6A of the Industrial Development Bank of India Act,
1964,or

(d)any other institution that may be specified by the

Bank in this behalf:

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(v) amounts received in the ordinary course of business, by
way of–

(a) security deposit,

(b) dealership deposit,

(c) earnest money,

(d) advance against orders for goods, properties or

services,

any amount received from an individual or a firm or an

(vi)
association of individuals not being a body corporate,
registered under any enactment relating to money lending
which is for the time being in force in any State; and

(vii) any amount received by way of subscriptions in respect of

achit.

Explanation I.– ‘‘Chit’’ has the meaning assigned to it in

clause (b) of section 2 of the Chit Funds Act, 1982.

Explanation II.– Any credit given by a seller to a buyer on

the sale of any property (whether movable or
immovable) shall not be deemed to be deposit for the
purposes of this clause;]

1[(c) ‘‘financial institution’’ means any non-banking institution

which carries on as its business or part of its business any of
the following activities, namely:–

(i)the financing, whether by way of making loans or

advances or otherwise, of any activity other than its own:

the acquisition of shares, stock, bonds, debentures or

(ii)
securities issued by a Government or local authority or
other marketable securities of a like nature:

(iii) letting or delivering of any goods to a hirer under a hire-

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purchase agreement as defined in clause (c) of section 2 of
the Hire-Purchase Act, 1972:

(iv) the carrying on of any class of insurance business;

(v) managing, conducting or supervising, as foreman, agent

or in any other capacity, of chits or kuries as defined in any
law which is for the time being in force in any State, or any
business, which is similar thereto;

(vi)collecting, for any purpose or under any scheme or

arrangement by whatever name called, monies in lump sum
or otherwise, by way of subscriptions or by sale of units, or
other instruments or in any other manner and awarding
prizes or gifts, whether in cash or kind, or disbursing
monies in any other way, to persons from whom monies are
collected or to any other person, 1[but does not include any
institution, which carries on as its principal business,–

(a) agricultural

operations; or (aa)

industrial activity; or]

(b)the purchase or sale of any goods (other than

securities) or the providing of any services; or

(c)the purchase, construction or sale of immovable

property, so however, that no portion of the income of
the institution is derived from the financing of purchases,
constructions or sales of immovable property by other
persons;]

2[Explanation.– For the purposes of this clause,

‘‘industrial activity’’ means any activity specified in sub-
clauses (i)to
(xviii) of clause (c) of section 2 of the Industrial
Development Bank of India Act, 1964;]
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(d) ‘‘firm’’ means a firm as defined in the Indian Partnership Act,

19323[*
* *];

(e) ‘‘non-banking institution’’ means a

company, corporation 4[or cooperative society].

5[(f) ‘‘non-banking financial company’’ means–

(i) a financial institution which is a company;

a non-banking institution which is a company and which

(ii)
has as its principal business the receiving of deposits, under
any scheme or arrangement or in any other manner, or
lending in any manner;

such other non-banking institution or class of such

(iii)
institutions, as the Bank may, with the previous approval of
the Central Government and by notification in the Official
Gazette, specify;]

6[45-IA. Requirement of registration and net owned fund.

(1)Notwithstanding anything contained in this Chapter or in any
other law for the time being in force, no non-banking financial
company shall commence or carry on the business of a non-
banking financial institution without–

(a) obtaining a certificate of registration issued under this

Chapter; and

(b)having the net owned fund of twenty-five lakh rupees or

such other amount, not exceeding two hundred lakh rupees, as
the Bank may, by notification in the Official Gazette, specify.

(2)Every non-banking financial company shall make an

application for registration to the Bank in such form as the Bank
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may specify:

Provided that a non-banking financial company in existence on

the commencement of the Reserve Bank of India (Amendment)
Act, 1997 shall make an application for registration to the Bank
before the expiry of six months from such commencement and
notwithstanding anything contained in sub-section (1) may
continue to carry on the business of a non-banking financial
institution until a certificate of registration is issued to it or
rejection of application for registration is communicated toit.

(3) Notwithstanding anything contained in sub-section (1), a non-

banking financial company in existence on the commencement of
the Reserve Bank of India (Amendment) Act, 1997 and having a
net owned fund of less than twenty-five lakh rupees may, for the
purpose of enabling such company to fulfil the requirement of the
net owned fund, continue to carry on the business of a non-
banking financial institution–

(i) for a period of three years from such commencement; or

for such further period as the Bank may, after recording the
(ii)
reasons in writing for so doing, extend, subject to the condition
that such company shall, within three months of fulfilling the
requirement of the net owned fund, inform the Bank about
such fulfilment:

Provided that the period allowed to continue business under

this subsection shall in no case exceed six years in the
aggregate.

(4) The Bank may, for the purpose of considering the application
for registration, require to be satisfied by an inspection of the
books of the non- banking financial company or otherwise that
the following conditions are fulfilled:–

(a)that the non-banking financial company is or shall be in a

position to pay its present or future depositors in full as and
when their claims accrue;

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(b)that the affairs of the non-banking financial company are

not being or are not likely to be conducted in a manner
detrimental to the interest of its present or future depositors;

(c) that the general character of the management or the

proposed management of the non-banking financial company
shall not be prejudicial to the public interest or the interest of
its depositors;

(d)that the non-banking financial company has adequate

capital structure and earning prospects;

(e) that the public interest shall be served by the grant of

certificate of registration to the non-banking financial company
to commence or to carry on the business in India;

(f)that the grant of certificate of registration shall not be

prejudicial to the operation and consolidation of the financial
sector consistent with monetary stability, economic growth
and considering such other relevant factors which the Bank
may, by notification in the Official Gazette, specify; and

(g) any other condition, fulfilment of which in the opinion of

the Bank, shall be necessary to ensure that the commencement
of or carrying on of the business in India by a non-banking
financial company shall not be prejudicial to the public interest
or in the interest of the depositors.

(5)The Bank may, after being satisfied that the conditions

specified in sub- section (4) are fulfilled, grant a certificate of
registration subject to such conditions which it may consider fit to
impose.

(6)The Bank may cancel a certificate of registration granted to a

non-banking financial company under this section if such
company–

(i) ceases to carry on the business of a non-banking financial

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institution in India; or

has failed to comply with any condition subject to which the

(ii)
certificate of registration had been issued to it; or

(iii)at any time fails to fulfill any of the conditions referred to in

clauses
(a) to (g) of sub-section (4);or

(iv) fails–

(a) to comply with any direction issued by the Bank under

the provisions of this chapter; or

(b)to maintain accounts in accordance with the

requirements of any law or any direction or order issued by
the Bank under the provisions of this Chapter; or

(c)to submit or offer for inspection its books of account and

other relevant documents when so demanded by an
inspecting authority of the Bank; or

(v)has been prohibited from accepting deposit by an order

made by the Bank under the provisions of this Chapter and
such order has been in force for a period of not less than three
months:

Provided that before cancelling a certificate of registration

on the ground that the non-banking financial company has
failed to comply with the provisions of clause (ii) or has
failed to fulfill any of the conditions referred to in clause (iii)
the Bank, unless it is of the opinion that the delay in
cancelling the certificate of registration shall be prejudicial
to public interest or the interest of the depositors or the
non-banking financial company, shall give an opportunity to
such company on such terms as the Bank may specify for
taking necessary steps to comply with such provision or
fulfillment of such condition;

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Provided further that before making any order of
cancellation of certificate of registration, such company
shall be given a reasonable opportunity of being heard.

(7) A company aggrieved by the order of rejection of application

for registration or cancellation of certificate of registration may
prefer an appeal, within a period of thirty days from the date on
which such order of rejection or cancellation is communicated to
it, to the Central Government and the decision of the Central
Government where an appeal has been preferred to it, or of the
Bank where no appeal has been preferred, shall be final:

Provided that before making any order of rejection of appeal,

such company shall be given a reasonable opportunity of being
heard.

Explanation.– For the purposes of this section,–

(I) “net owned fund” means–

(a) the aggregate of the paid-up equity capital and

free reserves as disclosed in the latest balance-sheet
of the company after deducting there from–

(i) accumulated balance of loss;

(ii) deferred revenue expenditure; and

(iii) other intangible assets; and

(b) further reduced by the amounts representing–

(1) investments of such company in shares of–

(i) its subsidiaries;

(ii) companies in the same group;

(iii) all other non-banking financial companies;

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and

(2)the book value of debentures, bonds,

outstanding loans and advances (including hire-
purchase and lease finance) made to, and deposits
with,–

(i) subsidiaries of such company; and

(ii) companies in the same group,

to the extent such amount exceeds ten per cent of

(a) above.

(II)“subsidiaries” and “companies in the same group”

shall have the same meanings assigned to them in the
Companies Act,1956.

45- IB. Maintenance of percentage of assets.

(1)Every non-banking financial company shall invest and

continue to invest in India in unencumbered approved securities,
valued at a price not exceeding the current market price of such
securities, an amount which, at the close of business on any day,
shall not be less than five per cent, or such higher percentage not
exceeding twenty-five per cent, as the Bank may, from time to
time and by notification in the Official Gazette, specify, of the
deposits outstanding at the close of business on the last working
day of the second preceding quarter:

Provided that the Bank may specify different percentages of

investment in respect of different classes of non-banking
financial companies.

(2)For the purpose of ensuring compliance with the provisions of

this section, the Bank may require every non-banking financial
company to furnish a return to it in such form, in such manner and
for such period as may be specified by the Bank.
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(3)If the amount invested by a non-banking financial company at

the close of business on any day falls below the rate specified
under subsection (1), such company shall be liable to pay to the
Bank, in respect of such shortfall, a penal interest at a rate of three
per cent per annum above the bank rate on such amount by which
the amount actually invested falls short of the specified
percentage, and where the shortfall continues in the subsequent
quarters, the rate of penal interest shall be five per cent per
annum above the bank rate on such shortfall for each subsequent
quarter.

(4) (a) The penal interest payable under sub-section (3) shall be
payable within a period of fourteen days from the date on which a
notice issued by the Bank demanding payment of the same is
served on the non-banking financial company and, in the event of
a failure of the non-banking financial company to pay the same
within such period, penalty may be levied by a direction of the
principal civil court having jurisdiction in the area where an office
of the defaulting non-banking financial company is situated and
such direction shall be made only upon an application made in
this behalf to the court by the Bank; and

(b) When the court makes a direction under clause (a), it shall
issue a certificate specifying the sum payable by the non-
banking financial company and every such certificate shall be
enforceable in the same manner as if it were a decree made by
the court in a suit.

(5) Notwithstanding anything contained in this section, if the Bank

is satisfied that the defaulting non-banking financial company had
sufficient cause for its failure to comply with the provisions of
sub-section (1), it may not demand the payment of the penal
interest.

Explanation,– For the purposes of this section,–

“approved securities” means securities of any State

(i)
Government or of the Central Government and such bonds,
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both the principal whereof and the interest whereon shall
have been fully and unconditionally guaranteed
by any such Government;

(ii)“unencumbered approved securities” includes the

approved securities lodged by the non-banking financial
company with another institution for an advance or any
other arrangement to the extent to which such securities
have not been drawn against or availed of or encumbered in
any manner;

“quarter” means the period of three months ending on

(iii)
the last day of March, June, September or December.

45- IC. Reserve fund.

(1) Every non-banking financial company shall create a reserve

fund and transfer therein a sum not less than twenty per cent of
its net profit every year as disclosed in the profit and loss account
and before any dividend is declared.

(2)No appropriation of any sum from the reserve fund shall be

made by the non-banking financial company except for the
purpose as may be specified by the Bank from time to time and
every such appropriation shall be reported to the Bank within
twenty-one days from the date of such withdrawal:

Provided that the Bank may, in any particular case and for
sufficient cause being shown, extend the period of twenty-one
days by such further period as it thinks fit or condone any
delay in making such report.

(3) Notwithstanding anything contained in sub-section (1), the

Central Government may, on the recommendation of the Bank and
having regard to the adequacy of the paid-up capital and reserves
of a non-banking financial company in relation to its deposit
liabilities, declare by order in writing that the provisions of sub-
section (1) shall not be applicable to the non-banking financial
company for such period as may be specified in the order:

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Provided that no such order shall be made unless the amount

in the reserve fund under sub-section (1) together with the
amount in the share
premium account is not less than the paid-up capital of the non-
banking financial company.]

45J. Bank to regulate or prohibit issue of prospectus or

advertisement soliciting deposits of money.

The Bank may, if it considers necessary in the public interest so to

do, by general or special order,–

(a) regulate or prohibit the issue by any non-banking

institution of any prospectus or advertisement soliciting
deposits of money from the public; and

(b)specify the conditions subject to which any such

prospectus or advertisement, if not prohibited, may be issued.

1[45JA. Power of Bank to determine policy and issue directions.

(1) If the Bank is satisfied that, in the public interest or to regulate

the financial system of the country to its advantage or to prevent
the affairs of any non-banking financial company being conducted
in a manner detrimental to the interest of the depositors or in a
manner prejudicial to the interest of the non-banking financial
company, it is necessary or expedient so to do, it may determine
the policy and give directions to all or any of the non-banking
financial companies relating to income recognition, accounting
standards, making of proper provision for bad and doubtful debts,
capital adequacy based on risk weights for assets and credit
conversion factors for off-balance- sheet items and also relating to
deployment of funds by a non-banking financial company or a
class of non-banking financial companies or non- banking
financial companies generally, as the case may be, and such non-
banking financial companies shall be bound to follow the policy so
determined and the directions so issued.
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(2) Without prejudice to the generality of the powers vested

under sub- section (1), the Bank may give directions to non-
banking financial companies generally or to a class of non-banking
financial companies or to any non- banking financial company in
particular as to–,

(a)the purpose for which advances or other fund based or non-

fund based accommodation may not be made; and

(b) the maximum amount of advances or other financial

accommodation or investment in shares and other securities
which, having regard to the paid-up capital, reserves and
deposits of the non-banking financial company and other
relevant considerations, may be made by that non- banking
financial company to any person or a company or to a group of
companies].

45K. Power of Bank to collect information from non-banking

institutions as to deposits and to give directions.

(1) The Bank may at any time direct that every non-banking
institution shall furnish to the Bank, in such form, at such intervals
and within such time, such statements, information or particulars
relating to or connected with deposits received by the non-
banking institution, as may be specified by the Bank by general or
special order.

(2)Without prejudice to the generality of the power vested in the

Bank under sub-section (1), the statements, information or
particulars to be furnished under sub-section (1) may relate to all
or any of the following matters, namely, the amount of the
deposits, the purposes and periods for which, and the rates of
interest and other terms and conditions on which, they are
received.

(3)The Bank may, if it considers necessary in the public interest

so to do, give directions to non-banking institutions either
generally or to any non- banking institution or group of non-
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banking institutions in particular, in respect of any matters
relating to or connected with the receipt of deposits, including the
rates of interest payable on such deposits, and the periods for
which deposits may be received.

(4) If any non-banking institution fails to comply with any

direction given by the Bank under sub-section (3), the Bank may
prohibit the acceptance of deposits by that non-banking
institution.

1[* * * * *]

(6) Every non-banking institution receiving deposits shall, if so

required by the Bank and within such time as the Bank may
specify, cause to be sent at the cost of the non-banking institution
a copy of its annual balance sheet and profit and loss account or
other annual accounts to every person from whom the non-
banking institution holds, as on the last day of the year to which
the accounts relate, deposits higher than such sum as may be
specified by the Bank.

45L. Power of Bank to call for information from financial

institutions and to give directions.

(1)If the Bank is satisfied that for the purpose of enabling it to

regulate the credit system of the country to its advantage it is
necessary so to do; it may–

(a) require financial institutions either generally or any group

of financial institutions or financial institution in particular, to
furnish to the Bank in such form, at such intervals and within
such time, such statements, information or particulars relating
to the business of such financial institutions or institution, as
may be specified by the Bank by general or special order.

(b) give to such institutions either generally or to any such

institution in particular, directions relating to the conduct of
business by them or by it as financial institutions or institution.
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(2) Without prejudice to the generality of the power vested in the

Bank under clause (a) of sub-section (1), the statements,
information or particulars to be furnished by a financial
institution may relate to all or any of the following matters,
namely, the paid-up capital, reserves or other liabilities, the
investments whether in Government securities or otherwise, the
persons to whom, and the purposes and periods for which,
finance is provided and the terms and conditions, including the
rates of interest, on which it is provided.

(3) In issuing directions to any financial institution under clause

(b) of sub- section (1), the Bank shall have due regard to the
conditions in which, and the objects for which, the institution has
been established, its statutory responsibilities, if any, and the
effect the business of such financial institution is likely to have on
trends in the money and capital markets.

45M. Duty of non-banking institutions to furnish statements, etc.,

required by Bank.

It shall be the duty of every non-banking institution to furnish the

statements, information or particulars called for, and to comply
with any direction given to it, under the provisions of this Chapter.

1[45MA. Powers and duties of auditors.

(1) It shall be the duty of an auditor of a non-banking institution to

inquire whether or not the non-banking institution has furnished
to the Bank such statements, information or particulars relating to
or connected with deposits received by it, as are required to be
furnished under this Chapter, and the auditor shall, except where
he is satisfied on such inquiry that the non- banking institution
has furnished such statements, information or particulars, make a
report to the Bank giving the aggregate amount of such deposits
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held by the non-banking institution;

2[(1A) The Bank may, on being satisfied that it is necessary so to

do, in the public interest or in the interest of the depositors or for
the purpose of proper assessment of the books of account, issue
directions to any non-banking financial company or any class of
non-banking financial companies or non- banking financial
companies generally or to the auditors of such non-banking
financial company or companies relating to balance-sheet, profit
and loss account, disclosure of liabilities in the books of account
or any matter relating thereto;]

(2)Where, in the case of 1[a non-banking financial company] the

auditor has made, or intends to make, a report to the Bank under
sub-section (1), he shall include in his report under sub-section
(2) of section 227 of the Companies Act, 1956, the contents of the
report which he has made, or intends to make to the Bank.]

2[(3) Where the Bank is of the opinion that it is necessary so to do

in the public interest or in the interest of the non-banking
financial company or in the interest of the depositors of such
company, it may at any time by order direct that a special audit of
the accounts of the non-banking financial company in relation to
any such transaction or class of transactions or for such period or
periods, as may be specified in the order, shall be conducted and
the Bank may appoint an auditor or auditors to conduct such
special audit and direct the auditor or the auditors to submit the
report toit.

(4) The remuneration of the auditors as may be fixed by the Bank,

having regard to the nature and volume of work involved in the
audit and the expenses of or incidental to the audit, shall be borne
by the non-banking financial company so audited.]

3[45MB. Power of Bank to prohibit acceptance of deposit and

alienation of assets.

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(1) If any non-banking financial company violates the provisions
of any section or fails to comply with any direction or order given
by the Bank under any of the provisions of this Chapter, the Bank
may prohibit the non-banking financial company from accepting
any deposit.

(2)Notwithstanding anything to the contrary contained in any

agreement or instrument or any law for the time being in force,
the Bank, on being satisfied that it is necessary so to do in the
public interest or in the interest of the depositors, may direct, the
non-banking financial company against which an order
prohibiting from accepting deposit has been issued, not to sell,
transfer, create charge or mortgage or deal in any manner with its
property and assets without prior written permission of the Bank
for such period not exceeding six months from the date of the
order.

45MC. Power of Bank to file winding up petition.

(1) The Bank, on being satisfied that a non-banking financial

company,–

(a) is unable to pay its debt; or

(b)has by virtue of the provisions of section 45-IA become

disqualified to carry on the business of a non-banking financial
institution ;or

(c)has been prohibited by the Bank from receiving deposit by

an order and such order has been in force for a period of not
less than three months; or

(d)the continuance of the non-banking financial company is

detrimental to the public interest or to the interest of the
depositors of the company, may file an application for winding
up of such non-banking financial company under the
Companies Act,1956.

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(2)A non-banking financial company shall be deemed to be unable
to pay its debt if it has refused or has failed to meet within five
working days any lawful demand made at any of its offices or
branches and the Bank certifies in writing that such company is
unable to pay its debt.

(3)A copy of every application made by the Bank under sub-

section (1) shall be sent to the Registrar of Companies.

(4) All the provisions of the Companies Act, 1956 relating to

winding up of a company shall apply to a winding up proceeding
initiated on the application made by the Bank under this
provision.]

45N. Inspection.

1[(1) The Bank may, at any time, cause an inspection to be made

by one or more of its officers or employees or other persons
(hereafter in this section referred to as the inspecting authority)-

(i)of any non-banking institution, including a financial

institution, for the purpose of verifying the correctness or
completeness of any statement, information or particulars
furnished to the Bank or for the purpose of obtaining any
information or particulars which the non-banking institution
has failed to furnish on being called upon to do so; or

(ii)of any non-banking institution being a financial institution,

if the Bank considers it necessary or expedient to inspect that
institution.]

(2) It shall be the duty of every director or member of any

committee or other body for the time being vested with the
management of the affairs of the non-banking institution or other
officer or employee thereof to produce to the inspecting authority
all such books, accounts and other documents in his custody or
power and to furnish that authority with any statements and
information relating to the business of the institution as that
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authority may require of him, within such time as may be
specified by that authority.

(3)The inspecting authority may examine on oath any director or

member of any committee or body for the time being vested with
the management of the affairs of the non-banking institution or
other officer or employee thereof, in relation to its business and
may administer an oath accordingly.

[CHAPTER IIIC]

PROHIBITION OF ACCEPTANCE OF DEPOSITS BY

UNINCORPORATED BODIES

45R. Interpretation.

The words and expressions used in this Chapter and defined in

Chapter IIIB shall have the meanings respectively assigned to
them therein.]

2[45S. Deposits not to be accepted in certain cases.

(1)No person, being an individual or a firm or an unincorporated

association of individuals shall, accept any deposit–

(i)If his or its business wholly or partly includes any of the

activities specified in clause (c) of section 45-I;or

if his or its principal business is that of receiving of deposits

(ii)
under any scheme or arrangement or in any other manner, or
lending in any manner;

Provided that nothing contained in this sub-section shall

apply to the receipt of money by an individual by way of
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loan from any of his relatives or to the receipt of money by a
firm by way of loan from the relative or relatives of any of
the partners.

(2)Where any person referred to in sub-section (1) holds any

deposit on the 1st day of April, 1997 which is not in accordance
with sub-section (1), such deposit shall be repaid by that person
immediately after such deposit becomes due for repayment or
within three years from the date of such commencement,
whichever is earlier;

Provided that if the Bank is satisfied on an application made by

any person to the Bank that such person is unable to repay a
part of the deposits for reasons beyond his control or such
repayment shall cause extreme hardship to him, it may, by an
order in writing, extend such period by a period not exceeding
one year subject to such conditions as may be specified in the
order.

(3)On and from the 1st day of April, 1997, no person referred to
in sub- section (1) shall issue or cause to be issued any
advertisement in any form for soliciting deposit.

Explanation.– For the purposes of this section, a person shall

be deemed to be a relative of another if, and only if,–

(i) they are members of a Hindu undivided family; or

(ii) they are husband and wife; or

the one is related to the other in the manner indicated in

(iii)
the List of Relatives below:–

List of relatives–

1. Father, 2. Mother (including step-mother), 3. Son

(including stepson), 4. Son’s wife, 5. Daughter (including
step-daughter), 6. Father’s father, 7. Father’s mother, 8.
Mother’s mother, 9. Mother’s father, 10. Son’s son, 11. Son’s
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son’s wife, 12. Son’s daughter, 13. Son’s daughter’s husband,
14. Daughter’s husband, 15. Daughter’s son, 16. Daughter’s
son’s wife, 17. Daughter’s daughter, 18. Daughter’s
daughter’s husband, 19. Brother (including stepbrother),
20. Brother’s wife, 21. Sister (including step-sister), 22.
Sister’s husband.]

45T. Power to issue search warrants.

(1) Any court having jurisdiction to issue a search warrant under

the Code of Criminal Procedure, 1973 may, on an application by
an officer of the Bank or of the State Government authorised in
this behalf stating his belief that certain documents relating to
acceptance of deposits in contravention of the provisions of
section 45S are secreted in any place within the local limits of the
jurisdiction of such court, issue a warrant to search for such
documents.

(2)A warrant issued under sub-section (1) shall be executed in

the same manner and shall have the same effect as a search
warrant issued under the Code of Criminal Procedure,1973.]

1[CHAPTER IIID

REGULATION OF TRANSACTIONS IN DERIVATIVES, MONEY

MARKET INSTRUMENTS, SECURITIES, ETC.

45U. Definitions.

For the purposes of this Chapter,--.

(a) "derivative" means an instrument, to be settled at a future

date, whose value is derived from change in interest rate,
foreign exchange rate, credit rating or credit index, price of
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securities (also called "underlying"), or a combination of more
than one of them and includes interest rate swaps, forward
rate agreements, foreign currency swaps,

foreign currency-rupee swaps, foreign currency options,

foreign currency- rupee options or such other instruments as
may be specified by the Bank from time to time;

(b) "money market instruments" include call or notice money,

term money, repo, reverse repo, certificate of deposit,
commercial us ance bill, commercial paper and such other debt
instrument of original or initial maturity up to one year as the
Bank may specify from time to time;

(c)"repo" means an instrument for borrowing funds by selling

securities with an agreement to repurchase the securities on a
mutually agreed future date at an agreed price which includes
interest for the funds borrowed;

(d) "reverse repo" means an instrument for lending funds by

purchasing securities with an agreement to resell the securities
on a mutually agreed future date at an agreed price which
includes interest for the funds lent;

(e) "securities" means securities of the Central Government or

a State Government or such securities of a local authority as
may be specified in this behalf by the Central Government and,
for the purposes of "repo" or "reverse repo", include corporate
bonds and debentures.

45V. Transactions in derivatives.

(1) Notwithstanding anything contained in the Securities

Contracts (Regulation) Act, 1956 (42 of 1956) or any other law for
the time being in force, transactions in such derivatives, as may be
specified by the Bank from time to time, shall be valid, if at least
one of the parties to the transaction is the Bank, a scheduled bank,
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or such other agency falling under the regulatory purview of the
Bank under the Act, the Banking Regulation Act, 1949 (10 of
1949), the Foreign Exchange Management Act, 1999 (42 of 1999),
or any other Act or instrument having the force of law, as may be
specified by the Bank from time to time.

(2) Transactions in such derivatives, as had been specified by the

Bank from time to time, shall be deemed always to have been
valid, as if the provisions of sub-section (1) were in force at all
material times.

45W. Power to regulate transactions in derivatives, money

market instruments, etc.

(1)The Bank may, in public interest, or to regulate the financial

system of the country to its advantage, determine the policy
relating to interest rates or interest rate products and give
directions in that behalf to all agencies or any of them, dealing in
securities, money market instruments, foreign exchange,
derivatives, or other instruments of like nature as the Bank may
specify from time to time:

Provided that the directions issued under this sub-section shall

not relate to the procedure for execution or settlement of the
trades in respect of the transactions mentioned therein, on the
Stock Exchanges recognised under section 4 of the Securities
Contracts (Regulation) Act, 1956(42 of 1956).

(2) The Bank may, for the purpose of enabling it to regulate

agencies referred to in sub-section (1), call for any information,
statement or other particulars from them, or cause an inspection
of such agencies to be made.

45X. Duty to comply with directions and furnish information.

It shall be the duty of every director or member or other body for

the time being vested with the management of the affairs of the
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agencies referred to in section 45W to comply with the directions
given by the Bank and to submit the information or statement or
particulars called for under that section.]

CHAPTER IV

GENERAL

PROVISIONS

46. Contribution by Central Government to the Reserve Fund.

The 1[Central Government] shall transfer to the Bank rupee

securities of the value of five crores of rupees to be allocated by
the Bank to the Reserve Fund.

2[46A. Contribution to National Rural Credit (Long Term

Operations) Fund and National Rural Credit (Stabilisation) Fund.

The Bank shall contribute every year such sums of money as it

may consider necessary and feasible to do so, to the National
Rural Credit (Long Term Operations) Fund and the National Rural
Credit (Stablisation) Fund established and maintained by the
National Bank under sections 42 and 43, respectively, of the
National Bank for Agriculture and Rural Development Act, 1981.]

3[46B. * * * *]

[Section 46-B omitted by National Bank for Agriculture & Rural

Development Act, 1981 [61 of 1981] (w.e.f. 12-7-1982).]

4[46C. National Industrial Credit (Long Term Operations) Fund.

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(1)The Bank shall establish and maintain a Fund to be known as
the National Industrial Credit (Long Term Operations) Fund to
which shall be credited-

(a) an initial sum of ten crores of rupees by the Bank;

(a) such further sums of money as the Bank may contribute every
year:

Provided that the annual contribution during each of the

five years commencing with the year ending on the 30th day
of June, 1965 shall not be less than five crores of rupees:

Provided further that the Central Government may, if the

circumstances so require, authorise the Bank to reduce the
said sum of five crores of rupees in any year.

(2) The amount in the said Fund shall be applied by the Bank only
to the following objects, namely:-

1[*****]

2[(c) the making to the Exim Bank 3[or the Reconstruction

Bank 4[or the Small Industries Bank as the case may be,] of
loans and advances for the purposes of any business of the
Exim Bank 5[or the Reconstruction Bank, or 6[the Small
Industries Bank] as the case may be]];

(d) the purchasing of bonds and debentures issued by the Exim

Bank 7[or the Reconstruction Bank, 8[or the Small Industries
Bank] as the case may be]].

9[46D. National Housing Credit (Long Term Operations) Fund.

(1)The Bank shall establish and maintain a Fund to be known as

the National Housing Credit (Long Term Operations) Fund to
which shall be credited every year such sums of money as it may
consider necessary.
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(2) The amount in the said Fund shall be applied by the Bank only
to the following objects, namely:

(a)the making to the National Housing Bank of loans and

advances for the purpose of any business of the National
Housing Bank;

(b) the purchasing of bonds and debentures issued by the

National Housing Bank.

1[47. Allocation of surplus profits.

After making provision for bad and doubtful debts, depreciation

in assets, contributions to staff and superannuation funds 2[and
for all other matters for which provision is to be made by or under
this Act or which] are usually provided for by bankers, the balance
of the profits shall be paid to the Central Government.]

48. Exemption of Bank from income-tax and super-tax.

(1) Notwithstanding anything contained in 3[the Income-Tax Act,

1961], or any other enactment for the time being in force relating
to income-tax or super-tax, the Bank shall not be liable to pay
income-tax or super-tax on any of its income, profits orgains.

4[* * * * * *]

49. Publication of bank rate.

The Bank shall make public from time to time the standard rate at
which it is prepared to buy or re-discount bills of exchange or
other commercial paper eligible for purchase under this Act.

5[50. Auditors.

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(1)Not less than two auditors shall be appointed, and their
remuneration fixed, by the Central Government.

(2)The auditors shall hold office for such term not exceeding one
year as the Central Government may fix while appointing them,
and shall be eligible for re-appointment.]

51. Appointment of special auditors by Government.

Without prejudice to anything contained in section 50, the

1[Central Government] may at any time appoint the 2[Comptroller

and Auditor- General]3[* * *] to examine and report upon the

accounts of the Bank.

52. Powers and duties of auditors.

(1) Every auditor shall be supplied with a copy of the annual

balance-sheet, and it shall be his duty to examine the same,
together with the accounts and vouchers, relating thereto; and
every auditor shall have a list delivered to him of all books kept by
the Bank, and shall at all reasonable times have access to the
books, accounts and other documents of the Bank, and may, at the
expense of the Bank, 4[* * *] employ accountants or other persons
to assist him in investigating such accounts, and may, in relation
to such accounts, examine any Director or officer of the Bank.

(2) The auditors shall make a report 5[* * *] to the 6[Central

Government]7[* * *] upon the annual balance-sheet and accounts,
and in every such report they shall state whether, in their opinion,
the balance-sheet is a full and fair balance-sheet containing all
necessary particulars and properly drawn up so as to exhibit a
true and correct view of the state of the Bank’s affairs, and, in case
they have called for any explanation or information from the
Central Board, whether it has been given and whether it is
satisfactory. 8[**
*]

53. Returns.

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(1)The Bank shall prepare and transmit to the 9[Central
Government] a weekly account of the Issue Department and of the
Banking Department in10[such] from as the 11[Central]
Government] may, by notification in the
GazetteofIndia,prescribe.The [Central Government] shall cause
12

these
accounts to be 1[published in the Gazette of India at such
intervals and in such modified form as it may deem fit].

(2)The Bank shall also, within two months from the date on which
the annual accounts of the Bank are closed, transmit to the
2[Central Government] a copy of the annual accounts signed by

the Governor, the Deputy Governors and the Chief Accounting

Officer of the Bank, and certified by the auditors, together with a
report by the Central Board on the working of the Bank
throughout the year, and the 3[Central Government] shall cause
such accounts and report to be published in the Gazette of India.

4[* * * * * *]

5[54. Rural Credit and Development.

The Bank may maintain expert staff to study various aspects of

rural credit and development and in particular it may:-

(a) tender expert guidance and assistance to the National Bank;

(b)conduct special studies in such areas as it may consider

necessary to do so for promoting integrated rural
development.]

6[54A. Delegation of powers.

(1)The Governor may, by general or special order, delegate to a

Deputy Governor, subject to such conditions and limitations, if
any, as may be specified in the order, such of the powers and
functions exercisable by him7[* * *] under this Act or under any
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other law for the time being in force as he may deem necessary for
the efficient administration of the functions of the Bank.

(2) The fact that a Deputy Governor exercises any power or does
any act or thing in pursuance of this Act shall be conclusive proof
of his authority to do so.]

8[54AA. Power of Bank to depute its employees to other institutions.

1[(1) The Bank may, notwithstanding anything contained in any

law, or in any agreement, for the time being in force, depute any
member of its staff for such period as it may think fit, -

(a) to any institution which is wholly or substantially owned by

the Bank;

(b)to the Development Bank, so, however, that no such

deputation shall continue after the expiration of thirty months
from the commencement of section 5 of the Public Financial
Institutions Laws (Amendment) Act,1975;

(c)to the Unit Trust, so, however, that no such deputation shall
continue after the expiration of thirty months from the date
notified by the Central Government under sub-section (1) of
section 4A of the Unit Trust of India Act, 1963, and thereupon
the person so deputed shall, during the period of his
deputation, render such service to the institution to which he is
so deputed as that institution may require.]

(2)Where a person has been deputed to an institution under

subsection (1), he shall not be entitled to claim any salary,
emoluments and other terms and conditions of service which he
would not have been entitled to claim if he had not been so
deputed.

(3)Nothing contained in this section shall empower the Bank to

depute any member of its staff to any institution on any salary,
emoluments or other terms and conditions which is or are less
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favourable to him than that or those to which he is entitled
immediately before such deputation.

(4) For the purposes of this section, an institution shall be deemed

to be substantially owned by the Bank if in the capital of the
institution the Bank has not less than forty per cent, share.

Explanation. - The word “capital” means, in relation to the Unit

Trust, the initial capital of that Trust.]

55 and 56. [Reports by the Bank. Power to require declaration as to

ownership of registered shares.]

[Rep. by Act 62 of 1948, s. 7 and Sch.(w.e.f. 1-1-1949).]

57. Liquidation of theBank.

(1)Nothing in the 2[Companies Act, 1956], shall apply to the Bank,

and the Bank shall not be placed in liquidation save by order of
the 3[Central Government] and in such manner as 4[it may direct].

1[* * * * * *]

58. Power of the Central Board to make regulations.

(1)The Central Board may, with the previous sanction of the

2[Central Government] 3[by notification in the official Gazette]
make regulations consistent with this Act to provide for all
matters for which provision is necessary or convenient for the
purpose of giving effect to the provisions of this Act.

(2) In particular and without prejudice to the generality of the

foregoing provision, such regulations may provide for all or any of
the following matters, namely:-

4[* * * * *]

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(f)the manner in which the business of the Central Board shall
be transacted, and the procedure to be followed at meetings
thereof;

(g) the conduct of business of Local Boards and the delegation

to such Boards of powers and functions;

(h) the delegation of powers and functions of the Central Board

5[* * *] to Deputy Governors, Directors or officers of the Bank;

(i)the formation of Committees of the Central Board, the

delegation of powers and functions of the Central Board to
such Committees, and the conduct of business in such
Committees;

the constitution and management of staff and

(j)
superannuation funds for the officers and servants of the Bank;

(k)the manner and form in which contracts binding on the

Bank may be executed;

the provisions of an official seal of the Bank and the manner

(l)
and effect of its use;

(m)the manner and form in which the balance-sheet of the

Bank shall be drawn up, and in which the accounts shall be
maintained;

(n) the remuneration of Directors of the Bank;

(f) the relations of the scheduled banks with the Bank and the
returns to be submitted by the scheduled banks to the Bank;

(g)the regulation of clearing-houses for the banks 1(including

post office savings banks).

2[(pp) the regulation of fund transfer through electronic

means between the banks or between the banks and other
financial institutions referred to in clause (c) of section 45-I,
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including the laying down of the conditions subject to which
banks and other financial institutions shall participate in such
fund transfers, the manner of such fund transfers and the
rights and obligations of the participants in such fund
transfers.]

(h)the circumstances in which, and the conditions and

limitations subject to which, the value of any lost, stolen,
mutilated or imperfect currency note of the Government of
India or bank note may be refunded; and

(i) generally, for the efficient conduct of the business of the Bank.

3[(3) Any regulation made under this section shall have

effect from such earlier or later date as may be specified in
the regulation.

(4) Every regulation shall, as soon as may be after it is made by

the Central Board, be forwarded to the Central Government and
that Government shall cause a copy of the same to be laid before
each House of Parliament, while it is in session, for a total period
of thirty days which may be comprised in one session or in two or
more successive sessions, and if, before the expiry of the session
immediately following the session or the successive sessions
aforesaid, both Houses agree in making any modification in the
regulation, or both Houses agree that the regulation should not be
made, the regulation shall, thereafter, have effect only in such
modified form or be of no effect, as the case may be; so, however,
that any such modification or annulment shall be without
prejudice to the validity of anything previously done under that
regulation.]

4[(5)] Copies of all regulations made under this section shall be

available to the public on payment.

5[58A. Protection of action taken in good faith.

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(1) No suit, prosecution or other legal proceeding shall lie against
the Central Government or the Bank or any other person in
respect of anything which is
in good faith done or intended to be done under this Act or in
pursuance of any order, regulation or direction made or given
there under.

(2)No suit or other legal proceeding shall lie against the Central
Government or the Bank for any damage caused or likely to be
caused by anything which is in good faith done or intended to be
done under this Act or in pursuance of any order, regulation or
direction made or given there under.]

1[CHAPTER

PENALTIES

58B. Penalties.

(1) Whoever in any application, declaration, return, statement,

information or particulars made, required or furnished by or
under or for the purposes of any provisions of this Act, or any
order, regulation or direction made or given there under or in any
prospectus or advertisement issued for or in connection with the
invitation by any person, of deposits of money from the public
wilfully makes a statement which is false in any material
particular knowing it to be false or wilfully omits to make a
material statement shall be punishable with imprisonment for a
term which may extend to three years and shall also be liable
tofine.

(2) If any person fails to produce any book, account or other

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document or to furnish any statement, information or particulars
which, under this Act or any order, regulation or direction made
or given there under, it is his duty to produce or furnish or to
answer any question put to him in pursuance of the provisions of
this Act or of any order, regulation or direction made or given
there under, he shall be punishable with fine which may extend to
two thousand rupees in respect of each offence and if he persists
in such failure or refusal, with further fine which may extend to
one hundred rupees for every day, after the first during which the
offence continues.

(3) If any person contravenes the provisions of section 31, he

shall be punishable with fine, which may extend to the amount of
the bill of exchange, hundi, promissory note or engagement for
payment of money in respect whereof the offence is committed.

(4)If any person discloses any credit information, the disclosure

of which is prohibited under section 45E, he shall be punishable
with imprisonment for a term, which may extend to six months, or
with fine, which may extend to one thousand rupees, or with both.

1[(4A) If any person contravenes the provisions of sub-section (1)

of section 45-IA, he shall be punishable with imprisonment for a
term which shall not be

less than one year but which may extend to five years and with
fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees.

(4AA) If any auditor fails to comply with any direction given or

order made by the Bank under section 45MA, he shall be
punishable with fine, which may extend to five thousand rupees.

(4AAA) Whoever fails to comply with any order made by the

Company Law Board under sub-section (2) of section 45QA, shall
be punishable with imprisonment for a term which may extend to
three years and shall also be liable to a fine of not less than rupees
fifty for every day during which such non-compliance continues.]

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(5) If any person, 2[other than an auditor]-

(a)receives any deposit in contravention of any direction given

or order made under Chapter IIIB; or

3[(aa) fails to comply with any direction given or order made

by the Bank under any of the provisions of Chapter IIIB; or]

(b)issues any prospectus or advertisement otherwise than in

accordance with section 45NA or any order made under
section 45J, as the case may be, he shall be punishable with
imprisonment for a term which may extend to three years and
shall also be liable to fine which may extend,–

in the case of a contravention falling under clause (a), to

(i)
twice the amount of the deposit received; and

in the case of a contravention falling under clause (b), to

(ii)
twice the amount of the deposit called for by the prospectus
or advertisement.

4[(5A) If any person contravenes any provision of section 45S, he

shall be punishable with imprisonment for a term which may
extend to two years, or with fine which may extend to twice the
amount of deposit received by such person in contravention of
that section, or two thousand rupees, whichever is more, or with
both:

Provided that in the absence of special and adequate reasons to

the contrary to be mentioned in the judgement of the court, the
imprisonment shall not be less than one year and the fine shall
not be less than one thousand rupees.

less than one year but which may extend to five years and with
fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees.

(4AA) If any auditor fails to comply with any direction given or

order made by the Bank under section 45MA, he shall be
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punishable with fine, which may extend to five thousand rupees.

(4AAA) Whoever fails to comply with any order made by the

Company Law Board under sub-section (2) of section 45QA, shall
be punishable with imprisonment for a term which may extend to
three years and shall also be liable to a fine of not less than rupees
fifty for every day during which such non-compliance continues.]

(6) If any person, 2[other than an auditor]-

(a)receives any deposit in contravention of any direction given

or order made under Chapter IIIB; or

3[(aa) fails to comply with any direction given or order made

by the Bank under any of the provisions of Chapter IIIB; or]

(b)issues any prospectus or advertisement otherwise than in

accordance with section 45NA or any order made under
section 45J, as the case may be, he shall be punishable with
imprisonment for a term which may extend to three years and
shall also be liable to fine which may extend,–

in the case of a contravention falling under clause (a), to

(i)
twice the amount of the deposit received; and

in the case of a contravention falling under clause (b), to

(ii)
twice the amount of the deposit called for by the prospectus
or advertisement.

4[(5A) If any person contravenes any provision of section 45S, he

shall be punishable with imprisonment for a term which may
extend to two years, or with fine which may extend to twice the
amount of deposit received by such person in contravention of
that section, or two thousand rupees, whichever is more, or with
both:

Provided that in the absence of special and adequate reasons to

the contrary to be mentioned in the judgement of the court, the
imprisonment shall not be less than one year and the fine shall
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not be less than one thousand rupees.
(5B) Notwithstanding anything contained in section 29 of the
Code of Criminal Procedure, 1973, it shall be lawful for a
Metropolitan Magistrate or a Judicial Magistrate of the first class
to impose a sentence of fine in excess of the limit specified in that
section on any person convicted under subsection (5A).]

(7)If any other provision of this Act is contravened or if any

default is made in complying with any other requirement of this
Act or of any order, regulation or direction made or given or
condition imposed there under, any person guilty of such
contravention or default shall be punishable with fine which may
extend to two thousand rupees and where a contravention or
default is a continuing one, with further fine which may extend to
one hundred rupees for every day after the first, during which the
contravention or default continues.

58C. Offences by companies.

(1) Where a person committing a contravention or default

referred to in section 58B is a company, every person who, at the
time the contravention or default was committed, was in charge
of, and was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be deemed
to be gulity of the contravention or default and shall be liable to be
proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall

render any such person liable to punishment if he proves that
the contravention or default was committed without his
knowledge or that he had exercised all due diligence to prevent
the contravention or default.

(2)Notwithstanding anything contained in sub-section (1), where

an offence under this Act has been committed by a company and it
is proved that the same was committed with the consent or
connivance of or is attributable to any neglect on the part of, any
director, manager, secretary, or other officer or employee of the

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company, such director, manager, secretary, other officer or
employee shall also be deemed to be guilty of the offence and shall
be liable to be proceeded against and punished accordingly.

Explanation 1. – Any offence punishable under this Act shall be

deemed to have been committed at the place where the
registered office or the principal place of business, as the case
may be, in India, of the company is situated.

Explanation 2. – For the purpose of this section, -

(a) “a company” means any body corporate and includes a

corporation, a non-banking institution, a firm, a co-
operative society or other association of individuals;

(b) “director”, in relation to a firm, means a partner in the

firm.

58D. Application of section 58B barred:-

Nothing contained in section 58B shall apply to, or in respect of, any
matter dealt with in section 42.

58E. Cognizance of offences.

(1) No court shall take cognizance of any offence punishable under

this Act except upon a complaint in writing made by an officer of
the Bank, generally or specially authorized in writing in this
behalf by the Bank, and no court other than that of a Metropolitan
Magistrate or a Judicial Magistrate of the first class or a court
superior thereto shall try any such offence:

1[Provided that in respect of any offence punishable under

sub-section (5A) of section 58B, a complaint in writing may
also be made by an officer of the State Government, generally
or specially authorised in writing in this behalf by that
Government.]
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(2) Notwithstanding anything contained in the Code of Criminal

Procedure, 1973 a Magistrate may, if he sees reason so to do,
dispense with the personal attendance of the officer of the Bank
filing the complaint, but the Magistrate may in his discretion, at
any stage of the proceedings, direct the personal attendance of the
complainant.

58F. Application of fine.

A court imposing any fine under this Act may direct that the whole
or any part thereof shall be applied in, or towards payment of, the
costs of the proceedings.]

2[58G. Power of Bank to impose fine.

(1)Notwithstanding anything contained in section 58B, if the

contravention or default of the nature referred to in section 58B is
committed by a non- banking financial company, the Bank may
impose on such non-banking financial company-

(a) a penalty not exceeding five thousand rupees; or

(b) where the contravention or default is under sub-section (4A)

or clause
(a) or clause (aa) of sub-section (5) of section 58B, a penalty
not exceeding five lakh rupees or twice the amount involved in
such contravention or default, where the amount is
quantifiable, whichever is more; and where such contravention
or default is a continuing one, further penalty which may
extend to twenty-five thousand rupees for every day, after the
first, during which the contravention or default continues.

(2)For the purpose of imposing penalty under sub-section (1), the

Bank shall serve a notice on the non-banking financial company
requiring it to show
cause why the amount specified in the notice should not be
imposed as a penalty and a reasonable opportunity of being heard
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shall also be given to such non-banking financial company.

(3) Any penalty imposed by the Bank under this section shall be
payable within a period of thirty days from the date on which
notice issued by the Bank demanding payment of the sum is
served on the non-banking financial company and, in the event of
failure of the non-banking financial company to pay the sum
within such period, may be levied on a direction made by the
principal civil court having jurisdiction in the area where the
registered office or the head office of the non-banking financial
company is situated;

Provided that no such direction shall be made, except on an

application made by an officer of the Bank authorised in this
behalf, to by the principal civil court.

(4)The court, which makes a direction under sub-section (3),

shall issue a certificate specifying the sum payable by the non-
banking financial company and every such certificate shall be
enforceable in the same manner as if it were a decree made by the
court in a civil suit.

(5)No complaint shall be filed against any non-banking financial

company in any court of law pertaining to any contravention or
default in respect of which any penalty has been imposed by the
Bank under this section.

(6) Where any complaint has been filed against a non-banking

financial company in a court in respect of contravention or default
of the nature referred to in section 58B, no proceedings for
imposition of penalty against that non-banking financial company
shall be taken under this section.]

59 to 61. [Amendment of Act 3 of 1906. Repeals, Amendment of

section 11,
Act 7 of 1913.]

Rep. by Act 20 of 1937, s. 3 Sch. II.

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1[THE FIRST SCHEDULE

(See section 9)

2[1. The Western Area shall consist of the States of Goa, Gujarat,
Madhya Pradesh and Maharashtra and the Union Territories of Dadra
and Nagar Haveli and Daman and Diu.
2. The Eastern Area shall consist of the States of Arunachal Pradesh,
Assam, Bihar, Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Sikkim,
Tripura and West Bengal and the Union Territories of Andaman and
Nicobar Islands.]

3. The Northern Area shall consist of the States of Jammu & Kashmir,
1[Punjab, Haryana,] 2[Himachal Pradesh], Rajasthan and Uttar Pradesh

and Union Territories of 3[Chandigarh,] 4[and Delhi].

4.The Southern Area shall consist of the States of Andhra Pradesh,

5[Karnataka],6[Tamil Nadu] and Kerala and the 7[Union Territories of

Pondicherry and8[Lakshadweep]].]

9[THE SECOND SCHEDULE

[See section 42 and section 2(e)]

10[SCHEDULED BANKS

A B Bank Ltd.
Abhyudaya Co-operative
Bank Ltd. ABN Amro Bank

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N.V.
Abu Dhabi Commercial Bank Ltd.

Ahmedabad Mercantile Co-Op

Bank Ltd. Akola Gramin Bank,
Akola (Maharashtra)
The Akola Janata Commercial Co-operative Bank
Ltd., Akola. The Akola Urban Co-operative Bank
Ltd., Akola.
Allahabad Bank
Allahabad Kshetriya Gramin Bank, Allahabad
(Uttar Pradesh) AmanathCo-operative Bank
Ltd.Bangalore
American Express Banking
Corporation Andhra Bank
Andhra Pradesh Grameena Vikas Bank, Warangal
(Andhra Pradesh) Andhra Pradesh Mahesh Co-Op Urban
Bank Ltd.
Andhra Pradesh State Co-operative Bank Ltd.,
Hyderabad Andhra Pragathi Grameena Bank,
Kapada ( Andhara Pradesh) Antwerp Diamond Bank
N.V.
Aravali Kshetriya Gramin Bank, Sawai Madhopur
(Rajasthan) Arunachal Pradesh Rural Bank,
Pasighat (Arunachal Pradesh) Aryavart Gramin
Bank, Lucknow (Uttar Pradesh)
Aurangabad Jalna Kshetriya Gramin Bank, Aurangabad

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(Maharashtra) Axis Bank Ltd.
Baitarani Gramya Bank, Baripada
(Orissa) Balasore Gramya Bank,
Balasore (Orissa)
Ballia Kshetriya Gramin Bank, Ballia (Uttar
Pradesh) Bank Internasional Indonesia
Bank of America N.A.
Bank of Bahrain & Kuwait
B.S.C. Bank of Baroda
Bank of
Ceylon Bank
of India
Bank of
Maharashtra
Bank of Nova
Scotia
The Bank of Rajasthan Ltd.
Bank of Tokyo - Mitsubishi
UFJ Ltd. Barclays Bank
Bardhaman Gramin Bank, Burdwan (West
Bengal) Bareilly Kshetriya Gramin Bank,
Bareilly (Uttar Pradesh)

Baroda Gujarat Gramin Bank, Bharuch

(Gujarat) Bassein Catholic Co-operative
Bank Ltd.

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Bastar Kshetriya Gramin Bank, Jagdalpur
(Chhattisgarh) Basti Gramin Bank, Basti (Uttar
Pradesh)
Begusarai Kshetriya Gramin Bank, Begusarai
(Bihar) Bhagalpur-Banka Kshetriya Gramin Bank,
Bhagalpur (Bihar) Bhandara Gramin Bank,
Bhandara (Maharashtra)
Bharat Co-operative Bank
(Mumbai) Ltd. Bharati Sahakari
Bank Limited.
Bhilwara Ajmer Kshetriya Gramin Bank, Bhilwara
(Rajasthan) Bihar State Co-operative Bank Ltd.,
Patna
Bikaner Kshetriya Gramin Bank, Bikaner (Rajasthan)
Bilaspur Raipur Kshetriya Gramin Bank, Bilaspur
(Chhattisgarh) BNP Paribas
Bolangir Anchalik Gramya Bank, Bolangir
(Orissa) Bombay Mercantile Co-operative
Bank Limited Buldhana Gramin Bank,
Buldhana (Maharashtra
Bundi-Chittorgarh Kshetriya Gramin Bank, Bundi
(Rajasthan) Cachar Gramin Bank, Silchar (Assam)
Calyon
Bank
Canara
Bank
The Catholic Syrian Bank Ltd.
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Cauvery Kalpatharu Grameena Bank, Mysore
(Karnataka) Central Bank of India
Chaitanya Godavari Grameena Bank, Guntur (Andhra
Pradesh) Chambal Kshetriya Gramin Bank, Morena
(Madhya Pradesh) Champaran Kshetriya Gramin
Bank, Motihari (Bihar) Chandrapur Gadchiroli Gramin
Bank, Chandrapur (Maharashtra) Charminar Co-
op.Urban BankLtd.
Chhindwara Seoni Kshetriya Gramin Bank,
Chhindwara (M.P.) Chikmagalur-Kodagu Grameena
Bank, Chikmagalur (Karnataka) China Trust
Commercial Bank
Citi Bank N.A.
Citizen Credit Co-operative Bank Ltd.,
Dadar.] City Union Bank Ltd.

Corporation Bank
Cosmos Co-operative Urban Bank
Ltd. Cuttack Gramya Bank,
Cuttack (Orissa) DBS Bank Ltd.
Deccan Grameena Bank, Rangareddy (Andhra
Pradesh) Dena Bank
Dena Gujarat Gramin Bank, Gandhinagar
(Gujarat) Deutsche Bank A.G.
Development Credit Bank Ltd.
Devipatan Kshetriya Gramin Bank, Gonda (Uttar

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Pradesh) The Dhanalakshmi Bank Ltd.
Dhenkanal Gramya Bank, Dhenkanal
(Orissa) Dombivli Nagari Sahakari
Bank Ltd.
Dungarpur-Banswara Kshetriya Gramin Bank, Dungarpur
(Rajasthan) Durg-Rajanandgaon Gramin Bank,
Rajanandgaon (Chhatisgarh) Ellaquai Dehati Bank,
Srinagar (Jammu & Kashmir)
Etawah Kshetriya Gramin Bank, Etawah (Uttar
Pradesh) Faizabad Kshetriya Gramin Bank,
Faizabad (Uttar Pradesh) Fatehpur Kshetriya
Gramin Bank, Fatehpur (Uttar Pradesh) The
Federal Bank Ltd.
Gaur Gramin Bank, Malda (West Bengal)
Giridih Kshetriya Gramin Bank, Giridih
(Jharkhand) Goa State Co-operative Bank
Ltd., Panaji
Goa Urban Co-operative Bank Limited.
Gopalganj Kshetriya Gramin Bank, Gopalganj (Bihar)
Gorakhpur Kshetriya Gramin Bank, Gorakhpur
(Uttar Pradesh) Greater Bombay Co-operative Bank
Limited
Gujarat State Co-operative Bank Ltd.,
Ahmedabad Gurgaon Gramin Bank,
Gurgaon (Haryana)
Gwalior Datia Kshetriya Gramin Bank, Datia
(Madhya Pradesh) Hadoti Kshetriya Gramin Bank,
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Kota (Rajasthan)
Haryana Gramin Bank, Rohtak (Haryana)
Haryana State Co-operative Bank
Ltd.,Chandigarh
Hazaribagh Kshetriya Gramin Bank, Hazaribagh
(Jharkhand) HDFC Bank Ltd.

Himachal Gramin Bank, Mandi (Himachal

Pradesh) Hindon Gramin Bank, Ghaziabad
(Uttar Pradesh) The Hongkong and
Shanghai Banking Corpn. Ltd. Howrah
Gramin Bank, Howrah (West Bengal) ICICI
BankLtd.
IDBI Bank
Ltd.
Indian Bank
Indian Mercantile Co-operative Bank
Ltd.,Lucknow Indian Overseas Bank
IndusInd Bank Ltd.
ING Vysya Bank
Ltd. J.P.Morgan
ChaseBank
Jaipur Thar Gramin Bank, Jaipur
(Rajasthan) Jalgaon Janata Sahakari
Bank Ltd.
The Jammu & Kashmir Bank Ltd.
Jammu Rural Bank, Jammu (Jammu
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&Kashmir) Janakalyan Sahakari Bank
Ltd., Bombay Janalaxmi Co-operative
BankLtd.
Janata Sahakari Bank Ltd.,Pune.
Jhabua-Dhar Kshetriya Gramin Bank, Jhabua (Madhya
Pradesh) JSC VTB Bank
Kalahandi Anchalika Gramya Bank, Bhawanipatna, (Orissa)
Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd.,
Ichalkaranji Kalupur Commercial Co-op.BankLtd.
Kalyan Janata Sahakari Bank Ltd., Kalyan
Kamraz Rural Bank, Sopore (Jammu &
Kashmir)
Kanpur Kshetriya Gramin Bank, Kanpur (Uttar
Pradesh) Kapole Co-operative Bank Ltd.,
Bombay
Karad Urban Co-operative
Bank Ltd. The Karnataka Bank
Ltd.
Karnataka State Co-operative Bank Ltd.,
Bangalore Karnataka Vikas Grameena Bank,
Dharwad (Karnataka) The Karur Vysya Bank
Ltd.
Kashi Gomti Samyut Gramin Bank, Varanasi (Uttar
Pradesh) Kerala State Co-operative Bank Ltd.,
Thiruvananthapuram

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The Khamgaon Urban Co-operative Bank Ltd.,
Khamgaon. Kisan Gramin Bank, Budaun (Uttar
Pradesh)
Koraput Panchabati Gramya Bank, Jeypore
(Orissa) Kosi Kshetriya Gramin Bank,
Pumea (Bhiar)
Kotak Mahindra Bank Ltd.
Krishna Grameena Bank, Gulbarga
(Karnataka) Krung Thai Bank Public
Company Ltd.
Kshetriya Gamin Bank, Hoshangabad (Madhya
Pradesh) Kshetriya Kisan Gramin Bank,
Mainpuri (Uttar Pradesh) Lakhimi Gaonlia
Bank, Golaghat (Assam)
The Lakshmi Vilas Bank Ltd.
Langpi Dehangi Rural Bank, Diphu (Assam)
Lucknow Kshetriya Gramin Bank, Sitapur (Uttar
Pradesh) Madhavpura Mercantile Co-Op Bank
Ltd.
Madhubani Kshetriya Gramin Bank, Madhubani
(Bihar) Madhya Bharath Gramin Bank, Sagar
(Madhya Pradesh) Madhya Bihar Gramin Bank,
Patna (Bihar)
Madhya Pradesh Rajya Sahakari Bank Maryadit., Bhopal
Mahakaushal Kshetriya Gramin Bank, Narsinghpur
(MadhyaPradesh) Mahanagar Co-operative Bank
Ltd.,Mumbai

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Maharashtra State Co-operative Bank Ltd.,
Mumbai Mallabhum Gramin Bank, Bankura
(West Bengal) Malwa Gramin Bank,
Sangrur(Punjab)
Mandla Balaghat Kshetriya Gramin Bank, Mandla
(Madhya Pradesh) Manipur Rural Bank,
Imphal(Manipur)
Mapusa Urban Co-operative Bank of Goa
Ltd.,Mapusa Marathwada Gramin Bank,
Nanded (Maharashtra) Marudhar Kshetriya
Gramin Bank, Churu (Rajasthan) Marwar
Gramin Bank, Pali(Rajasthan)
Mashreq Bank p.s.c.
Mayurakshi Gramin Bank, Suri (West
Bengal) Meghalaya Rural Bank,
Shillong (Meghalaya) Mehsana Urban
Co-Op Bank Ltd.
Mewar-Aanchalik Gramin Bank, Udaipur
(Rajasthan) Mithila Kshetriya Gramin Bank,
Darbhanga (Bihar)

Mizoram Rural Bank, Aizawal

(Mizoram) Mizuho Corporate Bank
Monghyr Kshetriya Gramin Bank, Monghyr
(Bihar) Murshidabad Gramin Bank,
Berhampore (West Bengal)

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Muzaffarnagar Kshetriya Gramin Bank, Muzaffarnagar
(Uttar Pradesh) Nadia Gramin Bank, Krishnanagar (West
Bengal)
Nagaland Rural Bank, Kohima (Nagaland)
Nagar Urban Co-operative Bank Ltd.,
Ahmednagar Nagpur Nagrik Sahakari
Bank Ltd.
Nainital Almora Kshetriya Gramin Bank, Nainital
(Uttaranchal) The Nainital Bank Ltd.
Narmada Malwa Gramin Bank, Indore (Madhya
Pradesh) Nasik Merchant's Co-operative Bank
Ltd.
New India Co-operative Bank Ltd.,
Bombay NKGSB Co-operative Bank
Ltd.
North Malabar Gramin Bank, Kannur
(Kerala) Nutan Nagarik Sahakari Bank
Ltd., Ahmedabad Oman International
Bank S.A.O.G.
Oriental Bank of Commerce
Orissa State Co-operative Bank Ltd.,
Bhubaneswar Palamau Kshetriya Gramin Bank,
Daltonganj (Jharkhand) Pallavan Grama Bank,
Salem (Tamil Nadu)
Pandyan Grama Bank, Virudhunagar
(Tamil Nadu) Parsik Janata Sahakari Bank
Ltd., Thane
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Parvatiya Gramin Bank, Chamba (Himachal
Pradesh) Pondicherry State Co-operative
Bank Ltd., Pondichery Pragathi Gramin Bank,
Bellary (Karnataka) Pragjyotish Gaonlia
Bank, Nalbari (Assam)
Pratapgarh Kshetriya Gramin Bank, Pratapgarh
(Uttar Pradesh) Prathama Bank, Moradabad (Uttar
Pradesh)
Pravara Sahakari Bank Ltd.
Puduvai Bharathiar Grama Bank
(Puducherry) Punjab & Maharashtra
Co-operative Bank Ltd. Punjab & Sind
Bank
Punjab Gramin Bank, Kapurthala (Punjab)

Punjab National Bank

Punjab State Co-operative Bank Ltd.,
Chandigarh Puri Gramya Bank, Pipli
(Orissa)
Rae Bareli Kshetriya Gramin, Rae Bareli (Uttar
Pradesh) Raigarh Kshetriya Gramin Bank,
Raigarh (Chhattisgarh) Rajasthan Gramin
Bank, Alwar (Rajasthan)
Rajasthan State Co-operative Bank Ltd.,
Jaipur Rajkot Nagrik Sahakari Bank Ltd.
Ranchi Kshetriya Gramin Bank, Ranchi (Jharkhand)
Rani Laxmi Bai Kshetriya Gramin Bank, Jhansi (Uttar Pradesh)

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Ratlam Mandasaur Kshetriya Gramin Bank, Mandsaur
(Madhya Pradesh) Ratnagiri Sindhudurg Gramin Bank,
Ratnagiri (Maharashtra)
The Ratnakar Bank Ltd
Rewa Sidhi Gramin Bank, Rewa (Madhya
Pradesh) Rupee Co-operative Bank Ltd.
Rushikulya Gramya Bank, Berhampur
(Orissa) Sagar Gramin Bank, Amtala
(West Bengal)
Samastipur Kshetriya Gramin Bank,
Samastipur (Bihar) Sangli Urban Co-operative
Bank Ltd.
Santhal Parganas Gramin Bank, Dumka
(Jharkhand) Saptagiri Grameena Bank,
Chitoor (Andhra Pradesh) Saran Kshetriya
Gramin Bank, Chapra (Bihar) Saraswat Co-
operative Bank Ltd.,Bombay
Sardar Bhiladwala Pardi Peoples Coop
BankLtd. Saurashtra Gramin Bank,
Rajkot(Gujarat)
SBI Commercial & International BankLtd.
Shahadol Kshetriya Gramin Bank, Shahadol (Madhya
Pradesh) Shahjahanpur Kshetriya Gramin Bank,
Shahjahanpur (Uttar Pradesh) Shamrao Vithal Co-
operative Bank Ltd.
Sharda Gramin Bank, Satna (Madhya
Pradesh) Shikshak Sahakari Bank Ltd.,
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Nagpur.
Shinhan Bank
Shreyas Gramin Bank, Aligarh (Uttar Pradesh)
Singhbhum Kshetriya Gramin Bank, Chaibasa
(Jharkhand) Siwan Kshetriya Gramin Bank,
Siwan(Bihar)

Societe Generale
Solapur Gramin Bank, Solapur
(Maharashtra) Solapur Janata
Sahakari Bank Ltd.
Sonali Bank Ltd.
The South Indian Bank Ltd.
South Malabar Gramin Bank, Malappuram (Kerala)
Sriganganagar Kshetriya Gramin Bank, Sriganganagar
(Rajasthan) Standard Chartered Bank
State Bank of Bikaner &
Jaipur State Bank of
Hyderabad State Bank
ofIndia
State Bank of Indore
State Bank of Mauritius
Ltd. State Bank of
Mysore
State Bank of Patiala
State Bank of
Travancore
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Subansiri Gaonlia Bank, North Lakhimpur (Assam)
Sultanpur Kshetriya Gramin Bank, Sultanpur (Uttar
Pradesh) Surat Peoples Co-op Bank Ltd.
Surguja Kshetriya Gramin Bank, Ambikapur
(Chhattisgarh) Sutluj Gramin Bank, Bhatinda
(Punjab)
Syndicate Bank
Tamil Nadu State Apex Co-operative Bank Ltd.,
Chennai Tamilnad Mercantile Bank Ltd.
Thane Bharat Sahakari BankLtd.
Thane Gramin Bank, Thane
(Maharashtra) Thane Janata
Sahakari BankLtd.
Tripura Gramin Bank, Agartala (Tripura)
Triveni Kshetriya Gramin Bank, Orai (Uttar
Pradesh) UBS AG
UCO Bank
Union Bank of
India United
Bank of India
Uttar Banga Kshetriya Gramin Bank, Cooch Behar
(West Bengal) Uttar Pradesh State Co-operative Bank
Ltd., Lucknow

Uttaranchal Gramin Bank, Dehradun

(Uttaranchal) Vaishali Kshetriya Gramin
Bank, Muzaffarpur (Bihar) Vasavi Coop

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Urban Bank LImited.
Vidisha-Bhopal Kshetriya Gramin Bank, Vidisha
(Madhya Pradesh) Vidur Gramin Bank, Bijnor (Uttar
Pradesh)
Vijaya Bank
Visveshwaraya Grameena Bank, Mandya
(Karnataka) West Bengal State Co-operative
Bank Ltd., Kolkata Yavatmal Gramin Bank,
Yavatmal (Maharashtra)
Yes Bank Ltd.
Zoroastrian Co-operative Bank Ltd., Bombay

THE THIRD SCHEDULE

[Repealed by Act 23 of 1955, s. 52 and Sch. III (w.e.f. 1-7-

1955)

THE FOURTH SCHEDULE

[Repealed by Act 62 of 1948, s. 7 and Sch. (w.e.f. 1-1-1949)

THE FIFTH SCHEDULE

[Repealed by the M.O. 1937]

*************

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# Important Questions:-

1. Define RBI? Explain the changing role of RBI?

2. Explain the credit control techniques of RBI?
3. Discuss the credit control by RBI?
4. Define RBI? Explain the function, importance & Limitations of RBI?
5. Write the note on Incorporation under RBI Act 1934?
6. Write the note on Capital & Management under RBI Act 1934?
7. Discuss the Business of banking Companies?
8. Write the detailed note on Collection and furnishing of Credit
Information.

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UNIT-IV

LAW OF LIMITATION ACT, 1963

LIMITATION ACT, 1963

 Limitation Act – Important Aspects
One of the important laws relating to banking is the Law of Limitation; this
law prompts the lending banker to remain vigilant in taking legal course of
action against the defaulting borrower.
A banker may take legal action by filing a suit, preferring an appeal or
applying for recovery only when the documents are within the period of
limitation. This period of limitation is the period prescribed under the
Limitation Act, 1963 within which any suit, appeal or application can be
made.
Therefore, banks should be careful to ensure that all legal loan documents
held are valid and not time barred. In other words, it is the responsibility of
lenders to ensure that all loan documents are properly executed and they are
all within the required limitation period as per the provisions of the
Limitation Act. This is one of the crucial aspect in credit management of banks.

Period of limitation for certain documents

Period of limitation and the time from which the period begins to run is
shown below:

 Revival of Documents
Banks are expected to hold valid legal documents as per the provisions of the
Limitation Act, if the limitation period expires, then the bank should arrange
to obtain fresh set of documents. However, under certain situations, the
limitation period can be extended. A limitation period can be extended in the
following manners:
1. Acknowledgement of debt: As per section 18 of the limitation Act, where,
before the expiration of the prescribed period for a suit or application in
respect of any property or right, an acknowledgment of liability in respect of

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such property or right has been made in writing signed by the party against
whom such property or right is claimed, or by any person through whom he
derives his title or liability, a fresh period of limitation shall be computed from
the time when the acknowledgment was so signed.
2. Part payment: As per section 19, where payment on account of a debt or of
interest on a legacy is made before the expiration of the prescribed period by
the person liable to pay or by his agent duly authorised in this behalf, a fresh
period of limitation shall be computed from the time when the payment was
made. However, an acknowledgment of the payment shall be in the
handwriting of, or in a writing signed by, the person making the payment.
3. Fresh set of documents: When the bank obtains a fresh set of documents
before the expiry of the original documents, fresh period of limitation will
start from the date of execution of the fresh documents. A time-barred debt
can be revived under Section 25 (3) of the Indian Contract Act only by a fresh
promise in writing, signed by the borrower or his authorized agent, generally
or specially authorized in that behalf. A promissory note/ fresh documents
executed for the old or a barred debt will give rise to a fresh cause of action
and a fresh limitation period will be available from the date of execution of
such documents.
 Court Holiday
As per section 4 of the Limitation Act, where the prescribed period for any
suit, appeal or application expires on a day when the court is closed, the suit,
appeal or application may be instituted, preferred or made on the day when
the court re-opens.
 Limitation Period – Precautions to be taken by bank:
1. Banks should preserve all the relevant loan documents in a secured place.
2. The documents should be under dual control of authorized persons.
3. Banks should not allow any document to become time barred as per the
provisions of Law of Limitation.
4. Banks internal control and monitoring system should be very effective in
the sense that the renewal of documents should be done well in advance.
BANKERS’ BOOK EVIDENCE ACT, 1891
 Important aspects of 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
1) any company or corporation carrying on business of banking;
2) any partnership or individual to whose books, provision of this Act are
made applicable;
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3) any post office saving bank or money order office.

(c) Bankers’ books include all books like ledgers, day books, cash books and
all other records used in the ordinary business of a bank. These can be
maintained in any form such as manual records, computer printouts, stored in
a micro-film, magnetic tape or any other form of mechanical or electronic
data. Such record can be kept 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 means
1) any proceeding or inquiry in which evidence is or may be given;
2) an arbitration;
3) any investigation or inquiry under Code of Criminal Procdure,1973 or
under any other law as applicable for collection of evidence, conducted
by a police officer or by any other person (not being a magistrate)
authorised in this behalf by a magistrate or by any law for the time
being in force.
(f) “certified copy” means when the books of a bank, –
(a) are maintained in written form, a copy of any entry in such books together
with a certificate written at the foot of such copy that it is a true copy of such
entry, that such entry is contained in one of the ordinary books of the bank
and was made in the usual and ordinary course of business and that such
book is still in the custody of the bank, and where the copy was obtained by a
mechanical or other process which in itself ensured the accuracy of the copy, a
further certificate to that effect, but where the book from which such copy was
prepared has been destroyed in the usual course of the bank’s business after
the date on which the copy had been so prepared, a further certificate to that
effect, each such certificate being dated and subscribed by the principal
accountant or manager of the bank with his name and official title; and
(b) consist of printouts of data stored in a floppy, disc, tape or any other
electro-magnetic data storage device, a printout of such entry or a copy of
such printout together with such statements certified in accordance with the
provisions of section 2A.
(c) a printout of any entry in the books of a bank stored in a micro film,
magnetic tape or in any other form of mechanical or electronic data retrieval
mechanism obtained by a mechanical or other process which in itself ensures
the accuracy of such printout as a copy of such entry and such printout
contains the certificate in accordance with the provisions of section 2A.

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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;
1) it is a true copy of such entry/entries;
2) the extract is taken from one of the ordinary books of the bank;
3) such entry was made in the ordinary course of business;
4) such record is still in the custody of the bank;
5) if the copy was obtained by a mechanical or other process a certificate is
required for the authenticity of the information/data.
The 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.
If the records are maintained in the electronic or mechanical form (computer
printouts, floppy, disc, tapes etc.,) a
 copy of print out and a certificate as mentioned for the manual
records:
(a) 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
1) the safety features adopted by the bank to protect the date
integrity;
2) prevention of unauthorized entry into the system,
3) checks and balancing system of verification of authenticity of
input and output,
4) if the data is retrieved and transformed, details of control system,
and
5) 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 banker’s 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.

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 Section 6 deals with the inspection of books by order of Court or

Judge. It states that –
(1) On the application of any party to a legal proceeding the Court or a Judge
may order that such party be at liberty to inspect and take copies of any
entries in a banker’s book for any of the purposes of such proceeding, or may
order the bank to prepare and produce, within a time to be specified in the
order, certified copies of all such entries accompanied by a further certificate
that no other entries are to be found in the books of the bank relevant to the
matters in issue in such proceeding, and such further certificate shall be dated
and subscribed in manner hereinbefore directed in reference to certified
copies.
(2) An order under this or the preceding section may be made either with or
without summoning the bank, and shall be served on the bank three clear
days (exclusive of bank holidays) before the same is to be obeyed, unless the
Court or Judge shall otherwise direct.
(3) The bank may at any time before the time limited for obedience to any
such order as aforesaid either offer to produce their books at the trial or give
notice of their intention to show cause against such order, and thereupon the
same shall not be enforced without further order.
Like any other organization, Banks and Financial Institutions are also required
to ensure that all the applicable provisions of the various tax laws (Income
Tax Act, Finance Act, etc.) are adhered to. Apart from the role of employer and
beneficiary of services, banks are expected to pay tax on the interest payable
to the customers as per the directives of authorities like, TDS on interest
payable on fixed deposits, NRO deposits, etc. Further, income of the bank from
investment like dealing in securities, also attract provisions of TDS.

 In view of the above banks should ensure that:

(i) calculation of taxes and recovery of such taxes are correctly handled.
(ii) deducted taxes are paid to the concerned authorities within the prescribed
due dates without fail. This is one of the crucial requirement non-compliance
of which attract penalty.
(iii) Banks are required to keep proper records of tax collection and
remittance.
(iv) Banks are required to report the details to the authorities within a specific
time frame. The reporting requirement would also include quarterly reporting
as well as submission of half yearly and/or annual statements.
(v) At the time of payment of salary to employees banks should deduct
applicable tax at source and arrange to issue the necessary certificates for TDS
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on form 16 to employees. For other deductions like payment to contractors

etc., TDS on form 16A should be issued to the service providers. These TDS
(16 and 16A forms) would serve (i) as evidence of tax deducted at source (ii)
as a record (iii) enable the employees and service providers/professionals to
claim refund of tax.
R
 Recovery Of Debts Due To Banks And Financial Institutions Act,
1993 (DRT Act)
Recovery of the dues of loans from the borrowers through courts was a major
issue for the banks and financialinstitutions due to huge back log of cases and
the time involved. The Act came into operation from 24th June 1993.
 Important highlights of DRT Act, 1993 are:
1. This Act constituted the special ‘Debt Recovery Tribunals’ for speedy
recovery;
2. This Act is applicable for the debt due to any Bank or Financial Institution
or a consortium of them, for the recovery of debt above ` Ten lakhs;
3. This Act is applicable to the whole of India except the State of Jammu &
Kashmir;
4. The term ’debt’ covers the following types of debts of the Banks and
Financial Institutions:
a) any liability inclusive of interest, whether secured or unsecured;
b) any liability payable under a decree or order of any Civil Court or any
arbitration award or otherwise; or
c) any liability payable under a mortgage and subsisting on and legally
recoverable on the date of application.

 Some examples of interpretation of the term ‘debt’ by different

courts are:
(a) In the case of United Bank of India vs DRT (1999) 4 SCC 69, the Supreme
Court held that if the bank had alleged in the suit that the amounts were due
to it from respondents as the liability of the respondents had arisen during the
course of their business activity and the same was still subsisting, it is
sufficient to bring such amount within the scope of definition of debt under
the DRT Act and is recoverable under that Act
(b) In G.V. Films vs UTI (2000) 100 Compo Cases 257 (Mad) (HC), it was held
that payment made by the bank by mistake is a debt

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(c) In the case of Bank of India vs Vijay Ramniklal AIR 1997 Guj. 75. it was held
that, if an Employee commits fraud and misappropriation of money, the
amount recoverable from him is not a debt within the meaning of DRT Act.

 Debt Recovery Tribunals

Debt recovery tribunals (DRTs) have been established by the Central
Government. The Central Government decides the jurisdiction and also
appoints one member as presiding officer, who should be at least a district
Judge.
 DRT – other important aspects:
(a) When DRT has jurisdiction in such matters the Civil Courts are debarred
from handling any case.
(b) The Tribunal and Appellate Tribunal function from the appointed day,
which is declared in notification. Their duties, powers and jurisdiction are
well defined. From the date of establishing the Tribunal, i.e., the appointed
day, no court or other authority should have any jurisdiction, powers or
authority to deal with in any way in recovery cases above Rupees ten lakh.
High Courts and Supreme Courts, however, have jurisdiction under
Constitution Articles 226 and 227.

 Recovery Procedure:
1. Section 25 deals with modes of recovery of debts.
It provides that Recovery Officer shall, on receipt of the copy of the certificate
under sub-section (7) of section 19, proceed to recover the amount of debt
specified in the certificate by one or more of the following modes, namely: –
(a) attachment and sale of the movable or immovable property of the
defendant;
(b) arrest of the defendant and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable
properties of the defendant.
2. Section 26 deals with validity of certificate and amendment thereof. It
states that –
(1) It shall not be open to the defendant to dispute before the Recovery Officer
the correctness of the amount specified in the certificate, and no objection to
the certificate on any other ground shall also be entertained by the Recovery
Officer.
(2) Notwithstanding the issue of a certificate to a Recovery Officer, the
Presiding Officer shall have power to withdraw the certificate or correct any
clerical or arithmetical mistake in the certificate by sending intimation
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to the Recovery Officer.

(3) The Presiding Officer shall intimate to the Recovery Officer any order
withdrawing or canceling a certificate or any correction made by him under
sub- section (2).
3. Section 27 deals with stay of proceedings under certificate and
amendment or withdrawal thereof.
It provides that –
(1) Notwithstanding that a certificate has been issued to the Recovery Officer
for the recovery of any amount, the Presiding Officer may grant time for the
payment of the amount, and thereupon the Recovery Officer shall stay the
proceedings until the expiry of the time so granted.
(2) Where a certificate for the recovery of amount has been issued, the
Presiding Officer shall keep the Recovery Officer informed of any amount paid
or time granted for payment, subsequent to the issue of such certificate to the
Recovery Officer.
(3) Where the order giving rise to a demand of amount for recovery of debt
has been modified in appeal, and, as a consequence thereof the demand is
reduced, the Presiding Officer shall stay the recovery of such part of the
amount of the certificate as pertains to the said reduction for the period for
which the appeal remains pending.
(4) Where a certificate for the recovery of debt has been received by the
Recovery Officer and subsequently the amount of the outstanding demands is
reduced 1[or enhanced] as a result of an appeal, the Presiding Officer shall,
when the order which was the subject-matter of such appeal has become final
and conclusive, amend the certificate or withdraw it, as the case may be.
4. Section 28 deals with other modes of recovery. It states that –
(1) Where a certificate has been issued to the Recovery Officer under sub-
section (7) of section 19, the Recovery Officer may, without prejudice to the
modes of recovery specified in section 25, recover the amount of debt by any
one or more of the modes provided under this section.
(2) If any amount is due from any person to the defendant, the Recovery
Officer may require such person to deduct from the said amount, the amount
of debt due from the defendant under this Act and such person shall comply
with any such requisition and shall pay the sum so deducted to the credit of
the Recovery Officer:
Provided that nothing in this sub-section shall apply to any part of the amount
exempt from attachment in execution of a decree of a civil court under section
60 of the Code of Civil Procedure, 1908 (5 of 1908).

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(3) (i) The Recovery Officer may, at any time or from time to time, by notice in
writing, require any person from whom money is due or may become due to
the defendant or to any person who holds or may subsequently hold money
for or on account of the defendant, to pay to the Recovery Officer either
forthwith upon the money becoming due or being held or within the time
specified in the notice (not being before the money becomes due or is held) so
much of the money as is sufficient to pay the amount of debt due from the
defendant or the whole of the money when it is equal to or less than that
amount.
(ii) A notice under this sub-section may be issued to any person who holds or
may subsequently hold any money for or on account of the defendant jointly
with any other person and for the purposes of this subsection, the shares of
the joint holders in such amount shall be presumed, until the contrary is
proved, to be equal.
(iii) A copy of the notice shall be forwarded to the defendant at his last
address known to the Recovery Officer and in the case of a joint account to all
the joint holders at their last addresses known to the Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a
notice is issued under the subsection shall be bound to comply with such
notice, and, in particular, where any such notice is issued to a post office, bank,
financial institution, or an insurer, it shall not be necessary for any pass book,
deposit receipt, policy or any other document to be produced for the purpose
of any entry, endorsement or the like to be made before the payment is made
notwithstanding any rule, practice or requirement to the contrary.
(v) Any claim respecting any property in relation to which a notice under this
sub-section has been issued arising after the date of the notice shall be void as
against any demand contained in the notice.
(vi) Where a person to whom a notice under this sub-section is sent objects to
it by a statement on oath that the sum demanded or the part thereof is not due
to the defendant or that he does not hold any money for or on account of the
defendant, then, nothing contained in this sub-section shall be deemed to
require such person to pay any such sum or part thereof, as the case may be,
but if it is discovered that such statement was false in any material particular,
such person shall be personally liable to the Recovery Officer to the extent of
his own liability to the defendant on the date of the notice, or to the extent of
the defendant’s liability for any sum due under this Act, whichever is less.
(vii) The Recovery Officer may, at any time or from time to time, amend or
revoke any notice under this subsection or extend the time for making any
payment in pursuance of such notice.
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(viii) The Recovery Officer shall grant a receipt for any amount paid in
compliance with a notice issued under this sub-section, and the person so
paying shall be fully discharged from his liability to the defendant to the
extent of the amount so paid.
(ix)Any person discharging any liability to the defendant after the receipt of a
notice under this sub-section shall be personally liable to the Recovery Officer
to the extent of his own liability to the defendant so discharged or to the
extent of the defendant’s liability for any debt due under this Act, whichever is
less.
(x) If the person to whom a notice under this sub-section is sent fails to make
payment in pursuance thereof to the Recovery Officer, he shall be deemed to
be a defendant in default in respect of the amount specified in the notice and
further proceedings may be taken against him for the realization of the
amount as if it were a debt due from him, in the manner provided in sections
25, 26 and 27 and the notice shall have the same effect as an attachment of a
debt by the Recovery Officer in exercise of his powers under section 25.
(4) The Recovery Officer may apply to the court in whose custody there is
money belonging to the defendant for payment to him of the entire amount of
such money, or if it is more than the amount of debt due an amount sufficient
to discharge the amount of debt so due.
(4A) The Recovery Officer may, by order, at any stage of the execution of the
certificate of recovery, require any person, and in case of a company, any of its
officers against whom or which the certificate of recovery is issued, to declare
on affidavit the particulars of his or its assets. (5) The Recovery Officer may
recover any amount of debt due from the defendant by distrait and sale of his
movable property in the manner laid down in the Third Schedule to the
Income-Tax Act, 1961 (43 of 1961).

5. Section 30 deals with appeal against the order of Recovery Officer. It

provides that –
(1) Notwithstanding anything contained in section 29, any person aggrieved
by an order of the Recovery Officer made under this Act may, within thirty
days from the date on which a copy of the order is issued to him, prefer an
appeal to the Tribunal.
(2) On receipt of an appeal under sub-section (1), the Tribunal may, after
giving an opportunity to the appellant to be heard, and after making such
inquiry as it deems fit, confirm, modify or set aside the order made by the
Recovery Officer in exercise of his powers under sections 25 to 28 (both
inclusive).
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 Special features of DRT:

The provisions of this Act have overriding effect when there is inconsistency
with any other law or in any instrument by virtue of any other law for the time
being in force.

 Case laws:
DRT is a special Act for recovery of debt due to banks and financial
institutions. DRT has overriding effect over the provisions of Companies
Act,1956, hence leave of the company court is not required even if the
company is under winding up proceedings (Allahabad Bank vs Canara Bank
AIR 2000 SC 1535) Money realized under DRT Act and distribution between
bank and other secured creditors, in cases where winding up proceedings are
pending in company court, priority of secured creditors is subject to
provisions of 529 A of Companies Act (as per the said section, priority of
secured creditors and workman over other dues and distribution inter se
between secured creditors and workmen should be pari-pasu).

Lok Adalats are organized under the Legal Services Authorities Act, 1987.
They are intended to bring about a compromise or settlement in respect of
any dispute or potential dispute. Lok Adalats derive jurisdiction by consent
or when the court is satisfied that the dispute between the parties could be
settled at Lok Adalats. It should be guided by the principles of justice, equity,
fair play and other legal principles. In case of settlement, the Award
should be binding on the parties to the dispute. No appeal should lie in any
court against the Award. Currently, Lok Adalats organised by civil courts to
effect a compromise between disputing parties in matters pending before any
court can handle cases up to a ceiling of ` 20 lakh.SARFAESI ACT, 2002
 SARFAESI Act
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.
 SARFAESI Act - Important Aspects
1. This Act is popularly called as Securitization Act
2. This Act empowers the banks and financial institutions to recover their
dues in Non- Performing Asset (NPA) accounts, without the intervention of a
court

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3. 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
4. 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
1) who holds secured assets of the borrower
2) (ii)from whom any money due or becoming due to the borrower
3) to pay such money to the secured creditor (bank)

 Some important terms covered under the SARFAESI Act

(1) Bank:- All the banking companies, Nationalised banks, the State Bank of
India and its subsidiary banks, Regional RuralBanks, co-operative banks etc.
(2) Borrower: (i) any person who has availed financial assistance from a bank
and/or financial institution
(ii) any personwho 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

(3) Central Registry:- The register office set up by the Central Government
for the purpose of registration of all the transactions of assetsecuritization,
reconstruction and transactions of creation of security interests. The
registration system will operateon 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.
(4) 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
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(iii) issues a letter of credit

(iv) issues letter of credit
(v) extends any other credit facility, it is called financial assistance.
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
(5) 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
(6) Qualified Institutional Buyer:- Qualified Institutional Buyer means a
financial institution, insurance company, bank, state financial corporation,
state industrial development corporation, trustee or securitisation company
or reconstruction company which has been granted a certificate of
registration under sub-section (4) of section 3 or any asset management
company making investment on behalf of mutual fund or pension fund or a
foreign institutional investor registered under the Securities and Exchange
Board of India Act, 1992 (15 of 1992) or regulations made there under, or any
other body corporate as may be specified by the Board;
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 RBI’s guidelines.
The term ‘hypothecation’ is defined under this Act as a charge in or upon any
movable property (existing or future) created by a borrower in favour of a
secured creditor.
Reconstruction company formed for the purpose of asset reconstruction and
registered under the Companies Act,1956 is called Reconstruction company.
The Act covers three important aspects viz.,
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(i) Securitization
(ii) Reconstruction of Financial assets and
(iii) Enforcement of security interest

 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 is 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.
 Asset Reconstruction Company
An asset reconstruction company’s 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 be said 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.
 Enforcement of Security Interest
The ‘Enforcement of security interest’ is important for recovery of the bank’s
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

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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 and 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 `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 Section 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 are like;
(a) Registration Act, 1908
(b) Companies Act, 2013
(c) Patents Act, 1970
(d) 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:
1. Securitization of financial assets
2. Reconstruction of financial assets
3. Creation of security interests
The central registry record can be kept fully or partly on electronic form

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Filing of 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. 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

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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 repossession 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
(a) notice period to be given to the customers before taking possession
(b) the procedure which the bank would follow for taking possession of the
property and
(c) 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.

 Section 31 deals with provisions of this Act not to apply in certain

cases. It provides that the provisions of this Act shall not apply to –
(a) a lien on any goods, money or security given by or under the Indian
Contract Act, 1872 (9 of 1872; or the Sale of Goods Act, 1930 (3 of 1930) or
any other law for the time being in force;
(b) a pledge of movables within the meaning of section 172 of the Indian
Contract Act, 1872 (9 of 1872);
(c) creation of any security in any aircraft as defined in clause (1) of section 2
of the Aircraft Act, 1934 (24 of 1934);
(d) creation of security interest in any vessel as defined in clause (55) of
section 3 of the Merchant Shipping Act, 1958 (44 of 1958);
(e) any conditional sale, hire-purchase or lease or any other contract in which
no security interest has been created;
(f) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930
(3 of 1930);
(g) any properties not liable to attachment (excluding the properties
specifically charged with the debt recoverable under this Act) or sale under
the first proviso to sub-section (1) of section 60 of the Code of Civil Procedure,
1908 (5 of 1908);
(h) any security interest for securing repayment of any financial asset not
exceeding one lakh rupees;
(i) any security interest created in agricultural land;
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(j) any case in which the amount due is less than twenty per cent of the
principal amount and interest thereon.
LENDERS LIABILITY ACT
In India, the SARFAESI Act. was enacted in 2002. On the basis of the
recommendations of the working group on Lenders’ Liability Laws
constituted by the Government of India, Reserve Bank of India had finalized a
set of codes of conduct called ‘the Fair Practice Code for Lenders’ and advised
banks to adopt the guidelines. All the banks have formulated their own set of
Fair Practice Codes as per the guidelines and implemented it from 1st
November, 2003.
 Some of the important features of Lenders Liability Act are:
Banks and financial institutions should give acknowledgment for receipt of all
loan applications. The loan applications should scrutinize the loan
applications within a reasonable period of time. Loan applications in respect
of priority sector and advances up to ` 2 lakhs should be comprehensive.
Lenders should ensure that the credit proposal is properly appraised after
assessing the creditworthiness of the applicants. They should not use margin
and security stipulation as a substitute for the due diligence on credit
worthiness and other terms and conditions. The lender should inform to the
borrower the sanction of credit limit in writing along with the terms and
conditions thereof and keep the borrower’s acceptance of the credit limits and
terms and condition on record. Duly signed acceptance letter should form part
of the collateral security. In case of consortium advances, the participating
lenders should evolve procedures to complete appraisal of proposals in
the time-bound manner to the extent feasible and communicate their decision
on financing or otherwise within a reasonable time. Lenders should ensure
timely disbursement of loans sanctioned in conformity with the terms
and conditions governing such sanction. Post disbursement supervision by
lenders, particularly in respect of loans up to `2 lakhs, should be constructive
with a view to taking care of any ‘lender-related; genuine difficulty that the
borrower may face, Lenders should release all securities on receiving
payment of loan or realization of loan, subject to any legitimate right of lien
for any other claim lenders may have against the borrowers. Lenders
should not interfere in the affairs of the borrowers except for what is allowed
as per the terms and conditions of the loan sanction documents. In the matter
of recovery of loans, lenders should not resort to undue harassment
Apart from the Fair Practices Code, banks should also have proper system for
grievance redressal system, Apart from the above code, banks have set up
codes for Bankers’ Fair Practices Code, Fair Practices Code for Credit
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Card Operations, Model Code for Collection of Dues and Repossession of

Security etc.,

 Banking Ombudsman
Banking Ombudsman Service is a grievance redressal system. This service is
available for complaints against abank’s deficiency of service. A bank’s
customer can submit complaint against the deficiency in the service of the
bank’s 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 Section 35A 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 Bank’s 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 other
services.

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 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 nonobservance 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 provisions of the fair practices code for
lenders as adopted by the bank or Code of Bank’s Commitment to Customers,
as the case may be.,
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 one’s 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. 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 ` 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 complainant’s time,
expenses incurred by the complainant, harassment and mental suffered by the
while passing such award.
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 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 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, 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.
THE CONSUMER PROTECTION ACT, 1986
To protect the interests of the consumers, the Consumer Protection Act was
enacted. The Act extends to the whole of India except the State of Jammu and
Kashmir. The Act covers all goods and services, except goods for resale or
for commercial purpose and services rendered free of charge and a contract of
personal service.
 The basic rights of consumers that are sought to be promoted and
protected under the Consumer Protection Act, 1986 are:
a) the right to be protected against marketing of goods and services which
are hazardous to life and property;
b) the right to be informed about the quality, quantity, potency, purity,
standard and price of goods, or services so as to protect the consumer
against unfair trade practices;
c) the right to be assured, wherever possible, access to variety of goods
and services at competitive prices;
d) the right to be heard and to be assured that consumers interests will
receive due consideration at appropriate forums;
e) the right to seek redressal against unfair trade practices or restrictive
trade practices or unscrupulous exploitation of consumers; and right to
consumer education.

 Consumer means any person who –

(a) buys any goods for a consideration which has been paid or promised or
partly paid and partly promised, or under any system of deferred payment
and includes any user of such goods other than the person who buys such
goods for consideration paid or promised or partly paid or partly promised, or
under any system of deferred payment when such use is made with the
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approval of such person, but does not include a person who obtains such
goods for resale or for any commercial purpose; or

(b) hires or avails of any services for a consideration which has been paid or
promised or partly paid and partly promised, or under any system of deferred
payment and includes any beneficiary of such services other than the person
who hires or avails of the services for consideration paid or promised, or
partly paid and partly promised, or under any system of deferred payment,
when such services are availed of with the approval of the first mentioned
person but does not include a person who avails of such services for any
commercial purpose. [Section 2(1)(d)]. It has been clarified that the term
commercial purpose does not include use by a consumer of goods bought and
used by him exclusively for the purpose of earning his livelihood by means of
self-employment.

 Therefore, to be a ‘consumer’ under the Act:

(i) the goods or services must have been purchased or hired or availed of for
consideration which has been paid in full or in part or under any system of
deferred payment, i.e. in respect of hire purchase transactions;

(ii) goods purchased should not be meant for re-sale or for a commercial
purpose. Goods purchased by a dealer in the ordinary course of his business
and those which are in the course of his business to supply would be deemed
to be for ‘re-sale; and

(iii) in addition to the purchaser(s) of goods, or hirer(s) or users of services,

any beneficiary of such services, using the goods/services with the approval of
the purchaser or hirer or user would also be deemed a ‘consumer under the
Act.
The complaint may be made by the complainant which includes a consumer or
any voluntary consumer association
registered under the Companies Act,1956 or any other law or the Central or
State Government or one or more consumers, having the same interest and in
case of death of a consumer his/ her legal heirs or representative. The Act is
for speedy disposal of the redressal of consumer disputes.
Consumer councils are established to promote and protect the rights of
consumers. The Central Council has the jurisdiction for the entire country,

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followed by the State Council for each state and District Council for each
district.
The Councils at the State level is headed by the chairman of the council, i.e.,
the Minister-in-Charge of the Consumer Affairs in the State Government.
The consumers’ complaints are dealt by District Forum, State and National
Commission. District forum and State Commission are established by the State
Governments, and the National Commission established by Central
Government. District Forum has powers to deal with cases up to ` 20 lakhs.
The State Commission deals with complaints exceeding value of ` 20 lakh and
below ` One crore and appeals against the orders of any District forum
within the State. The cases exceeding ` One crore would be handled by the
National Commission. They also deal with appeals against the order of any
State Commission.
Complaints should be in a prescribed manner, with full details, evidence and
applicable fee. Supporting affidavit is required. Admissibility of complaint is to
be decided within twenty one days. Similarly, other procedures and
requirements as per the Act which are in force, would be applicable.

 CASE STUDY
Collusion between Bank Officials and Builders – SARFAESI Act
It is strongly believed that the implementation of the provisions of the
SARFAESI Act, 2002 for making a proper balance between the objects and the
interests of the borrower is a very complicated exercise. There are so many
judgments on the provisions of the SARFAESI Act, 2002 and still certain areas
remained complicated. A typical case of the recent past and its facts are as
follows:
Facts:
Mr.A is a Senior Software Engineer working in a reputed Company and by
availing a loan from “L” Bank; he has purchased a building property in a City
(hereinafter referred to as “first loan”). Mr.A was paying all his installments
to the Bank in respect of his first loan. Thereafter a builder has approached
Mr.A to purchase another property through the Bank “L”. Though the
documents were presented by the builder to Mr.A, Mr.A has trusted the Bank
Officials and requested the Bank officials to look into all the legalities and the
details about the property. Mr.A was assured by the Bank Officials that he can
buy the property. After having the specific assurance from the officials of
the Bank “L”, Mr.A has purchased another property in the City through the
Bank “L” (hereinafter referred to as the ‘second loan’). While Mr.A was paying
all the installments in respect of the two loans, he has received a notice from
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a third person in respect of his second property and he was shocked to know
that his second property doesn’t actually belong to the builder. Apart from the
loan amount, Mr.A has also paid substantial amount of money to the
‘builder’. Though Mr.A was not used to do enquiries and not faced with any
litigation in life, Mr.A is forced to do his independent enquiry regarding the
second property and he finally found that he was cheated by the Bank Officials
and the Builder. Mr.A found that the Bank Officials of “L” has actually helped
the builder knowing fully that the builder can not sell the property and do not
possess any title over the property. Immediately after the occurrence of the
fraud, Mr.A has approached some professionals to file a criminal case against
the Bank Officials and the real estate people, but, soon he has realized the
difficulties in approaching the authorities and getting justice from the Courts.
Mr.A has also spent substantial amount of money on the litigation to bring the
fraudulent officials of “L” and the builders to book. While the process of
pursuing a criminal case against the Bank Officials of “L” and the builder was
going on, surprisingly Mr.A has received a notice from “L” bank asking to
repay the loan amount in respect of the Second Loan and he has also seen a
demand in the demand notice from the Bank that if Mr.A does not pay the
Second Loan Amount, then, they proceed against the First Loan Property. Mr.A
is literally shocked as to why he has to pay the Second Loan Amount as he was
literally cheated by the Bank Officials itself and he is also shocked as to how
the Bank can proceed against his First House Property as he was paying all the
installments in respect of his First Loan. Mr.A expressing an opinion that all
his hard earned money is invested in the property and he can not venture
loosing the property. Mr.A has come to the stage that only suicide will be a
solution for him under these circumstances.
Questions
1) What precautions and safeguards Mr A should have taken before
purchasing second loan property?
2) Can Bank L legally proceed against the first loan property of Mr A when
there is no default on his part in repayment of loan installments of that
property ,for the default in case of second property loan?
3) Is Bank L responsible to indemnify Mr A for the fraud committed by its
official in case of second loan?
4) How can Bank L realize the second loan amount?

5) What the legal remedies are available to Mr A for the fraud committed to
him by Bank official in collusion with the builders and also against the
demand notice of the Bank L to proceed against his first loan property?
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# Important Questions
1. Explain theProvisions of Bankers Book Evidence Act.

2. Define financial institutions ? Explain the Features of Recovery of Debts Due

to Banks and Financial Institutions Act, 1993

3. Write the detailed note on TDS Banking Cash Transaction Tax Service Tax.

4. Write the detailed note on Laws of Limitations

5. Examine the grounds under which the banking Ombudsman may reject the
complaint.

6. Explain the objects and features of Securitisation Act, 2002.

7. Examine the advantages of Securitisation Act to the banker

8. Write the note on Banking Ombudsman Lok Adalats,

9. Write the note on Lender’s Liability Act.

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Last page

Reference/Source:

1. Banking laws & Practice, SC Chand, sukhwinder mishra

2. Banking laws & Practice, Kalyani Publishers, S.N Maheswari & S.K
Maheswari

3. http://bankinglaw.lawnotes16mrks.com/

4.https://www.slideshare.net

5. http://www.icmai.in

6. https://www.icsi.edu/.com

7. https://www.wikipedia.com

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