BA4003 BANKING FINANCIAL

SERVICES
 Unit - 1
INTRODUCTION TO INDIAN BANKING SYSTEM AND
PERFORMANCE EVALUATION
Overview of Indian Banking System , Functions Of Banks ,
keys Acts Governing the Function Of Indian Banking System –
RBI Act 1943, Negotiable Instruments Act 1881, Banking
Regulations Act 1948 – Rights and Obligations of a Banker,
Overview of Financial Statement of Banks – Balance Sheet and
Income Statement.
OVER VIEW OF INDIAN BANKING SYSTEM
Modern banking in India originated in the last decade of the
18th century. Among the first banks were the Bank of
Hindustan, which was established in 1770 and liquidated in
1829–32; and the General Bank of India, established in 1786
but failed in 1791. The largest and the oldest bank which is still
in existence is the State Bank of India (S.B.I).
In the mid-nineteenth century the East India Company
established the Bank of Bengal, Bank of Bombay, Bank of
Madras.
It originated and started working as the Bank of Calcutta in
mid-June 1806. In 1809, it was renamed as the Bank of Bengal.
This was one of the three banks founded by a presidency
government, the other two were the Bank of Bombay in 1840
and the Bank of Madras in 1843.

The three banks were merged in 1921 to form the Imperial

Bank of India, which upon India's independence, became the
State Bank of India in 1955.

 For many years the presidency banks had acted as quasi-

central banks, as did their successors, until the Reserve Bank of
India was established in 1935, under the Reserve Bank of
India Act, 1934.
Nationalization was a major theme during the period after
independence due to the socialist philosophy adopted by the
First Prime Minister , Jawaharlal Nehru.

In 1969 Indira Gandhi, the Prime Minister , continued this

process nationalizing 14 major banks. Indian banks are unique
in many respects. prior to 1991 all banks were state owned. In
1991 when the government opened banking to private banks
(e.g., ICICI bank and Bank of America), the public sector has
dropped by 20%. However, state owned banks still controls
approximately 80% of the country, s banking assets.
DEFINITION OF BANK
Sec 5(1) (b) of the Banking Regulation Act, 1949 defines
banking as, ‘accepting for the purpose of lending or investment
of deposits from the public, repayable on demand or otherwise
and withdrawals by cheque, draft , order or otherwise.
Sec 5(1) (c) defines a banking company as, “ Any company
which transacts the business of banking in India”.
 Structure of Banking System in India
RESERVE BANK OF INDIA
1. Scheduled Banks 2. Non - Scheduled

a)Co-operative Banks:
 Primary Co-operative Banks
 Central Co-operative Banks
 State Co-operative Banks
 Long-term Co-operative Banks
 Urban Co-operative Banks
b) Commercial Banks
 Foreign Banks
 Indian bank : a. Private sector bank
b. Public sector bank : SBI and its associated banks, other Nationalized
banks , Regional Rural banks.
 Functions of banks
Mobilizations of savings
Facilitate commerce and trade
Balanced regional development
Provision of finance to backward communities and neglected
segments of society – commercial and cooperative bank on
concessional rate.
Development of agriculture and priority sectors in the
economy – agriculture, small scale industries (SSIs),retail
trade, small borrowers, self-employed persons, etc.., and also
exports .
Granting and issuing of letter of credit, traveler's cheques and
circular notes.

Buying and selling foreign exchange including bank notes,

bullion and specie.

Acquiring, holding, issuing on commission, underwriting, and

dealings in stocks, funds, shares, debentures, bonds,
obligations, securities and investments of all kinds.

Purchasing and selling securities on behalf of constituents or

others, the negotiating of loans and advances.

Safe custody of all kind.

KEY REGULATIONS IN INDIAN BANKING SECTOR
The key statutes and regulations that govern the banking industry in India are

 Reserve Bank of India Act, 1934 (RBI Act): The RBI Act was enacted to establish and set
out the functions of the RBI. The RBI Act empowers the RBI to issue rules, regulations,
directions and guidelines on a wide range of issues relating to the banking and the
financial sector.

 Banking Regulation Act, 1949 (BR Act): The BR Act provides a framework for the
supervision and regulation of all banks. It also gives the RBI the power to grant licences
to banks and regulate their business operation. The BR Act also sets out details of the
various businesses that a bank in India is permitted to engage in.

 Foreign Exchange Management Act, 1999 and the rules and regulations issued thereunder
(FEMA): The FEMA is the primary legislation in India which regulates cross-border
transactions and related activities. FEMA and the rules made thereunder are administered
by the RBI.
 KEY REGULATIONS IN INDIAN BANKING SECTOR
 RBI circular dealing with setting up of new banks, being the Guidelines for ‘on tap’
Licensing of Universal Banks in the Private Sector dated August 1, 2016.

 RBI circular dealing with setting up of small finance banks, being the Guidelines for
Licensing of ‘Small Finance Banks’ in the Private Sector dated November 27, 2014.

 RBI circular dealing with setting up of payment banks, being the Guidelines for
Licensing of ‘Payments Banks’ dated November 27, 2014.

 RBI circular on external commercial borrowings, being the Master Direction –

External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign
Currency by Authorised Dealers and Persons other than Authorised Dealers dated
January 01, 2016, as amended from time to time (ECB Regulations).

 In relation to banking operations, there are certain restrictions applicable to end use of
the loans and advances provided by banks, including in relation to funding real estate
and
KEY REGULATIONS IN INDIAN BANKING SECTOR
The key RBI regulations which are important in connection with the
regulation of banks are as follows
 RBI circulars dealing with capital adequacy and provisioning requirements, being
the Master Circular – Prudential Guidelines on Capital Adequacy and Market
Discipline-New Capital Adequacy Framework (NCAF) dated July 1, 2015, as
amended from time to time; the Master Circular – Prudential Norms on Capital
Adequacy – Basel I Framework dated July 1, 2015, as amended from time to
time; and the Master Circular on Basel III Capital Regulations dated July 1, 2015,
as amended from time to time.

 RBI directions dealing with ownership of banks being Master Direction –

Ownership in Private Sector Banks, Directions, 2016 dated May 12, 2016, as
amended from time to time.

 RBI circular dealing with setting up of branches and subsidiaries by foreign

banks, being the Scheme for Setting up of WOS by foreign banks in India issued
on November 06, 2013, as amended from time to time.
RESERVE BANK OF INDIA ACT,1934

It RBI, exercise control over banks from their opening-up to

their winding-up. The regulation do not apply uniformly to all
banks, and their applicability is dependent on the constitution
of the institution ,i.e., whether it is a statutory corporation , a
banking company or a cooperative society.
In the year 1926 ‘the commission on Indian Currency and
Finance which is also known as “Hilton Young Commission’
suggested the establishment of Reserve Bank in India.
Bill was introduced in the Indian legislative Assembly in 1927
and the bill was dropped on constitutional grounds.
The White paper on Indian constitutional Reforms published in
1933 shows RB Free from political influences should be
established.
A fresh bill was introduced in the Indian Legislative Assembly
on SEP 8, 1939 and the RBI Act was passed in SEP 1934.
The RBI started functioning from1 April, 1935 with 5 crores
divided into 5 lakhs fully paid-up shares of RS 200 each.
The entire share capital was contributed by private
shareholders with exceptional nominal value of 2.2 lakhs
subscribed by the central government.
 The Reserve Bank of India Act, 1934
The Reserve Bank of India Act, 1934

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]
(3) This section shall come into force at once, and the remaining
provisions of this Act shall come into force on such date or dates4 as the
5[Central Government] may, by notification in the Gazette of India,
appoint.
The Reserve Bank of India Act, 1934
2. Definitions.—In this Act, unless there is anything repugnant in the
subject or context,— 1 2[(aii)] “the Bank” means the Reserve Bank of
India constituted by this Act; 3[(aiii)] “Bank for International
Settlements” means by body corporate established with the said name
under the law of Swit­zerland in pursuance of an agreement dated the
(b) “the Central Board” means the Central Board of Directors of
the Bank [4] 5[6[(bvi)] “Deposit Insurance Corporation” means
the Deposit Insurance Corporation established under section 3
of the Deposit Insurance Corporation Act, 1961 (47 of 1961) 79
10[(bviiia)] “Exim Bank” means the Export-Import Bank of
India established under the Export-Import Bank of India Act,
1981] 11[(bix) “foreign currency” and “foreign exchange’ have
the meanings respectively assigned to them in the Foreign
Exchange Regulation Act, 1973(46 of 1973)
(c) “Industrial Finance Corporation” means the Industrial
Finance Corporation of India established under the Industrial
Finance Corporation Act, 1948 (15 of 1948)]
12[(ca) “International Development Association” means the
“Asso­ciation” referred to in the International Development
Association (Status, Immunities and Privileges) Act, 1960 (32
of 1960)
 The Reserve Bank of India Act, 1934
(cb) “International Finance Corporation” means the “Corporation”
referred to in the International Finance Corporation (Status,
Immunities and Privileges) Act, 1958 (42 of 1958)
(cc) “International Monetary Fund” and “International Bank for
Reconstruction and Development” means respectively the
“International Fund” and the “International Bank”, referred to in
the International Monetary Fund and Bank Act, 1945] 13[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 (61 of
1981);] 14[cccc) “National Housing Bank” means the National
Housing Bank established under section 3 of the National Housing
Bank Act, 1987] 15 16[(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 17 rupees which are legal tender 18[in 19[India]]
under the provisions of the Indian Coinage Act, 1906 (3 of 1906) 20
(e) “scheduled bank” means a bank included in the Second Schedule
21[(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 22[(ea) “Sponsor Bank” means a
Sponsor Bank as defined in the Regional Rural Banks Act, 1976]
23[24[(eb)] “State Bank” means the State Bank of India constitut­ed
under the State Bank of India Act, 1955 (23 of 1955)] 25 ,26[(fi) “State
Financial Corporation” means any State Financial Corporation
established under the State Financial Corporations Act, 1951 (63 of
1951)] 27[(g) “Unit Trust” means the Unit Trust of India established
under section 3 of the Unit Trust of India Act, 1963 (52 of 1963)] 28[(h)
“agricultural operations”, “central co-operative bank”, “co-operative
society”, “crops”, “marketing of corps”, “piscicul­ture”, “regional rural
bank” and “State co-operative bank” shall have the meanings
respectively assigned to them in the National Bank for Agriculture and
 The Reserve Bank of India Act, 1934
(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 (10 of 1949).]
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 1[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.
1[4. Capital of the Bank.—The capital of the Bank shall be
five crores of rupees.]
5. Increase and reduction of share capital.—[ Rep. by Act 62
of 1948, sec. 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,
1[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.
 The Reserve Bank of India Act, 1934
8. Composition of the Central Board, and term of office of Direc­
tors.—1[
(1) The Central Board shall consist of the following Directors,
namely:—
(a) a Governor and 2[not more than four] Deputy Governors to be
appointed by the Central Government;
(b) four Directors to be nominated by the Central Government, one
from each of the four Local Boards as constituted by section 9;
(c) 3[ten] Directors to be nominated by the Central Government;
and
(d) one Government official to be nominated by the Central Gov­
ernment.]
 (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 4[Central
Government]: 5[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]
 6[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) A Deputy 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 to vote: 7[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.]
 The Reserve Bank of India Act, 1934
(4) The Governor and a Deputy Governor shall hold office for such term
not exceeding five years as the 8[Central Government] may fix when
appointing them, and shall be eligible for re-appointment. 9[A Director
nominated under clause (c) of sub-section (1) shall 10hold office for a
period of four years 11[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. 12[13]
(7) A retiring Director shall be eligible for re-nomination.
1[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. 2[(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 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 1[2], 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 fund lunatic or becomes of unsound mind, or
(d) is an officer or employee of any bank, or 3[(e) is a
Director of banking company within the meaning of
clause (c) of section 5 of the 4[Banking Regulation Act,
1949 (10 of 1949)], or of a co-operative bank.]
 The Reserve Bank of India Act, 1934
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 Local Board]: 3[4[(2) A Director nominated under
clause (b) or clause (c) of sub-section(l) 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 section 13.]
(3) The 1[Central Government] shall remove from office any Direc­
tor, 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 section 10.
(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 5 nomination 6 as Director or member of a Local Board of
any person who is a member of 7[Parliament or the Legis­lature 8[of
any State]] shall be void, unless within two months of the date of his
5 nomination 6he ceases to be such member, and if any Director or
member of a Local Board is elected or nominated as a member of
9[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 may be.
(6) A Director may resign his office to the 10[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
become vacant.
 RBI 2006 ACT

The Reserve Bank of India (Amendment) Act, 2006 was enacted

in June 2006. Consequent to the enactment, the Reserve Bank,
vide its press release and circulars dated June 22, 2006 decided (i)
to continue the status quo on the rate of cash reserve ratio (CRR)
to be maintained by Scheduled Banks and the extant exemptions;
(ii) to remove the statutory minimum CRR maintenance
requirement of 3 per cent; and (iii) hence not to pay any interest
on the eligible CRR balances maintained by scheduled banks with
effect from the fortnight beginning June 24, 2006.
 RBI 2006 ACT

The Reserve Bank of India (Amendment) Act, 2006 was enacted in June 2006.
Consequent to the enactment, the Reserve Bank, vide its press release and circulars
dated June 22, 2006 decided (i) to continue the status quo on the rate of cash reserve
ratio (CRR) to be maintained by Scheduled Banks and the extant exemptions; (ii) to
remove the statutory minimum CRR maintenance requirement of 3 per cent; and
(iii) hence not to pay any interest on the eligible CRR balances maintained by
scheduled banks with effect from the fortnight beginning June 24, 2006.
 RBI 2006 ACT
Short title and commencement.-
(1) This Act may be called the Reserve Bank of India (Amendment)
Act, 2006 .
(2) It shall come into force on such date as the Central Government
may, by notification in the Official Gazette, appoint; and different
dates may be appointed for different provisions of this Act.
2. Amendment of section 17.- In section 17 of the Reserve Bank of
India Act, 1934 (hereinafter referred to as the principal Act),
(i) after clause (6), the following shall be inserted, namely:
(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,
(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;;
(ii) after clause (12A), the following shall be inserted, namely:
 RBI 2006 ACT
 (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;
 (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 funds lent;.
 3. Amendment of section 42.- In section 42 of the principal Act,
 (i) in sub- section (1),
 (a) for the words, brackets and figure three 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), the words, brackets and figure 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 shall be
substituted;
 (b) the proviso shall be omitted;
 (ii) sub- sections (1AA) and (1B) shall be omitted.
 4. Insertion of new Chapter IIID.-
 After Chapter IIIC of the principal Act, the following Chapter shall be
inserted, namely: CHAPTER IIID Regulation of transactions in
derivatives, money market instruments, securities, etc.
 RBI 2006 ACT
 (ii) sub- sections (1AA) and (1B) shall be omitted.
 4. Insertion of new Chapter IIID.- After Chapter IIIC of the principal Act, the
following Chapter shall be inserted, namely: CHAPTER IIID Regulation of
transactions in derivatives, money market instruments, securities, etc. 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 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 usance 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 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, or such
other agency falling under the regulatory purview of the Bank under the Act, the
Banking Regulation Act, 1949 , the Foreign Exchange Management Act, 1999 , or
any other Act or instrument having the force of law, as may be specified by the
Bank from time to time.
 RBI 2006 ACT
 (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 .
(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 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.. K. N. CHATURVEDI, Secy. to the Govt. of India.

Primary objects: Preamble to the RBI Act, 1934 spells out the
objectives of the RBI as:
(a) To regulate the issue of bank notes.
(b) To keep reserves with a view to securing monetary stability in India.
(c) To operate currency and credit system of the country to its advantage.
 RBI 2006 ACT
Powers and functions of RBI
Section 36 mentions the powers of RBI. The Reserve Bank may
prohibit banking companies from entering into a particular transaction
and can advise the banking company.
It can also assist the banking company by granting loans or advances
under Section 18.
It can direct the banking company to call for a meeting of its directors
to discuss the matters of the company.
It can also appoint officers to observe how the affairs of the banking
company are conducted.
Offences and punishment under the Banking Regulation Act, 1949
Various provisions are mentioned in the Act which states that a person
will be liable for imprisonment and fine if he does any act which is in
contravention with the Act. It is stated under Section 46 as below:
A person will be liable for imprisonment of up to three years and a
fine which may extend up to one crore rupees if he has
misrepresented any facts or presented the wrong acts intentionally.
A person will be liable to a fine of up to twenty lakh rupees and up
to fifty thousand rupees in case of a continuing offence if he fails
to produce the documents or books or refuses to answer the
questions asked by the inspection officer.
All the directors of the banking company will be held liable and
will be imposed a fine of twice the amount of the deposits made
with the banking company if the banking company has illegally
received any deposit.
The directors or the secretary will be punished if the company has
caused a default or the default occurred due to the negligence of
the director.
 ROLE AND FUNCTIONS OF RBI
The main function of Reserve Bank is to regulate the issue of
bank notes and the keeping of reserve with a view to securing
monetary stability in India and to generally to operate the
currency and credit system of the country to its advantage.
1. Monopoly of note issues: these function are maintained
through two departments, namely i)Issue Department ii)
Banking Department.
2. Banker to government
3. Adviser to the government
4. Controller of credit
Banking Regulations Act 1949
 A Bill was introduced in March
1948 and was passed in the
Parliament in Feb. 1949.It came
forced from 16th March,1949. This
Act was originally called the
Banking Companies Act,1949 and
now it is renamed as the Banking
Regulation Act,1949.
 BANKING REGULATIONS ACT 1949

Shortcomings of the Banking Regulation Act, 1949

The Banking Regulation Act has less scope on public sector banks.

The amendments in the Act are not enough to leverage the stressed

assets in the financial system. There are no strict provisions for

non-performing assets (NPA), and this gives a chance to the

defaulters to escape from the situation. Some provisions of this act

can hamper the working of the banks.

 The Banking Regulation Act, 1949
Different types of banks, such as commercial banks, cooperative
banks, rural banks, and private sector banks exist in India. The
Reserve Bank of India (RBI) is the governing body for regulating and
supervising the banks.
Banking Regulation Act, 1949 is an Act that provides a framework for
regulating the banks of India. The Act came into force on 16th March
1949. This Act gives RBI the power to control the behaviour of banks.
This Act was passed as Banking Companies Act, 1949. It did not
apply to Jammu and Kashmir until 1956. This Act monitors the day-
to-day operations of the bank.
Under this Act, the RBI can licence banks, put ​regulation over
shareholding and voting rights of shareholders, look over the
appointment of the boards and management, and lay down the
instructions for audits. RBI also plays a role in mergers and
liquidation.
 Objectives of the Banking Regulation Act, 1949
The objectives of the Banking Regulation Act are stated
below:
To meet the demand of the depositors and provide them
security and guarantee.
To provide provisions that can regulate the business of
banking.
To regulate the opening of branches and changing of
locations of existing branches.
To prescribe minimum requirements for the capital of
banks.
To balance the development of banking institutions.
Scope and applicability of the Banking Regulation Act, 1949
The sections under this Act are to be interpreted along with the
sections of the Companies Act, 1956, or any other laws
prevalent in the banking system. This Act applies to banking
companies and cooperative banks. It will not apply to a
primary agricultural credit society or a cooperative land
mortgage bank, or any other co-operative society, except
mentioned in Part V of the Act.
 The Banking Regulation Act, 1949
Features of the Banking Regulation Act, 1949
The Act has been divided into five parts comprising 56 sections.
The main features of the Act are mentioned below:
Non-banking companies are forbidden to receive money deposits
that are payable on demand.
Non-banking risks are reduced by prohibiting trading by banking
companies.
Maintaining minimum capital standards.
Regulation on the acquisition of shares of banking companies.
Power of the Central Government to make schemes for the
banks.
Provisions regarding liquidation proceedings for banking
companies.
NEGOTIABLE INSTRUMENTS ACT,1881

The term “negotiable instrument "consists of two words –

‘negotiable’ and ‘instrument’ which means ‘transferable by
delivery’ and ‘a written document by which a right is
created in favour of some person'. Thus, the term literally
means “A written document transferable by delivery”.

Negotiable Instruments act,1881.SEC 13 of the NI Act simply

states that, “negotiable instrument means promissory note, bill
of exchange or cheque payable either to order or to bearer.”
2002 Amendment to the Negotiable Instruments
Act

A "negotiable instrument" means a promissory note, bill or

exchange or cheque payable either to order or to bearer.
The term "negotiable instrument" as used in this Act means a
bill of exchange, promissory note, or check. A bill of
exchange is a negotiable instrument signed and issued by the
drawer authorizing the drawee to pay unconditionally at a
fixed future date a sum certain in money to the payee or
holder.
 Characteristics and features of Negotiable
Instruments - 2002
 Writing and signature- by parties
 Money –payable by legal tender money of India
 Freely transferability
 Title of holder free from all defects
 No notice to transfer & ( right to sue)- transferee can sue in his own name.
 Presumptions
 Special procedures- suits on promissory notes and bills os exchange.
 Popularity- easy and quick remedies in commercial transactions.
 Evidence- doc which fails quality as a NT can be evidence of fact of
indebtedness.
 Credit of the party- he can sign the instrument and pledged to the
instrument. It will never be dishonoured .
Types of Negotiable Instruments
NI classified into two
Instrument Negotiable by Law or statute
Instrument Negotiable by customs or usage of trade.
the term Negotiable Instrument literally means “A written
document transferable by delivery”.
 INSTRUMENTS PROVIDED BY NEGOTIABLE ACT 1881- 2002

1.PROMISSORY NOTE – an instrument in writing containing an

unconditional undertaking signed by the maker, to pay a certain sum of
money only to or the order of a certain person or to the bearer of the
instrument”.
2. BILLS OF EXCHANGE – It contains an order from the creditor to the
debtor, to pay a certain person, after a certain period.
3. CHEQUE- It is always drawn on printed format.
Instrument Negotiable by customs or usage of trade - 2002

There are certain other instruments which have acquired the

character of negotiability by usage or custom of trade.
Eg : In England the following instrument have been held to be
negotiable by custom.
1. Exchequer bills
2. Bank notes
3. Share & debentures warrants
4. Circular notes
5. Bearer debentures
6. Share certificates with blank transfer deeds etc.,
 PROVISIONS RELATING TO CRR

Cash reserve ratio (CRR) is the percentage of a bank's total deposits that it needs to
maintain as liquid cash. This is an RBI requirement, and the cash reserve is kept
with the RBI. A bank does not earn interest on this liquid cash maintained with the
RBI and neither can it use this for investing and lending purposes.

Cash Reserve Ratio (CRR)

Every bank shall maintain in India by way of cash reserve, a sum equivalent to such
percent of the total of its Net Demand and Time Liabilities (NDTL) in India, in such
manner and for such dates, as the Reserve Bank in terms of Section 42(1) of the RBI
Act, 1934 and Section 18(1) of BR Act, 1949 [including provisions of Section 18 (1)
of the BR Act as applicable to cooperative banks], 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.
Incremental CRR
In terms of Section 42(1A) of RBI Act, 1934, the Reserve
Bank may require the scheduled banks to maintain, in
addition to the balances prescribed under Section 42(1) of
the Act, an additional average daily balance, the amount of
which shall not be less than the rate specified by the
Reserve Bank in the notification published in the Gazette
of India from time to time.
Provided that such additional balance shall be calculated
with reference to the excess of the total of NDTL of the
bank as shown in the Returns referred to in Section 42(2)
of the RBI Act, 1934 over the total of its NDTL at the close
of the business on the date specified in the notification.
 (a) Every scheduled bank shall maintain in India with the Reserve Bank, an average
daily balance, the amount of which shall not be less than four per cent of the bank’s
total NDTL in India as on the last Friday of the second preceding fortnight. The
extent of provisions in this regard as applicable to scheduled banks shall, mutatis
mutandis, be applicable to Small Finance Banks (SFBs) and Payments Banks (PBs).
 (b) Every co-operative bank, (not being a scheduled co-operative bank), shall
maintain in India on daily basis by way of cash reserve with itself; or by way of
balance in current account with the Reserve Bank or the state co-operative bank of
the State concerned; or by way of net balance in current accounts; or in case of a
primary (Urban) co-operative bank, balances with District Central Co-operative
bank of the district concerned; or in one or more the aforesaid ways, a sum
equivalent to four per cent of its NDTL in India, as on the last Friday of the second
preceding fortnight.
 (c) Local Area Banks shall maintain in India by way of cash reserve with itself or
by way of balance in a current account with Reserve Bank, or by way of net
balance in current accounts or in one or more of the aforesaid ways, a sum
equivalent to four percent of the total of its NDTL in India as on the last Friday of
the second preceding fortnight.
Maintenance of Minimum CRR on Daily Basis
 Every scheduled bank, small finance bank and payments bank shall maintain minimum
CRR of not less than ninety per cent of the required CRR on all days during the reporting
fortnight, in such a manner that the average of CRR maintained daily shall not be less than
the CRR prescribed by the Reserve Bank.

Scheduled Banks are exempted from maintaining CRR on the following liabilities
 a) Net of liabilities to the banking system from the assets with the banking system defined
in Section 42 (1) (d) and 42 (1) (e) of the RBI Act, 1934 as under :-
 (A) Liabilities to the banking system as computed under clause (d) of explanation to
section 42(1) of the RBI Act, 1934.
 The aggregate of the "liabilities" of a scheduled bank, which is not a State Co-operative
Bank, to:-
 i) the State Bank of India
 ii) a corresponding new bank constituted by Section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970, and a corresponding new bank
constituted by Section 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980,
 iii) any Regional Rural Bank established under Section 3 of the Regional Rural Banks Act,
1976,
 iv) a banking company as defined in Clause (c) of Section 5 of the Banking Regulation
 v) a co-operative bank as defined in Clause (cci) of Section 56 of the Banking
Regulation Act, 1949, and
 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.
 (B) Liabilities to the banking system as computed under clause (e) of explanation
to section 42(1) of the RBI Act, 1934.
The aggregate of the "liabilities" of a scheduled bank, which is a State Co-
operative Bank, to:-
 i) the State Bank of India
 ii) a corresponding new bank constituted by Section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970, and a corresponding new
bank constituted by Section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1980,
 iii) a banking company as defined in Clause (c) of Section 5 of the Banking
Regulation Act, 1949 (10 of 1949),
 iv) any other financial institution notified by the Central Government in this
behalf,
 PROVISIONS FOR NPA’s

The bank can use the provisions made to set off the losses due to NPAs. In this way
it helps to present a True and Fair picture of the Bank's Balance Sheet. For urban
coop banks the general provisioning requirement for all types of 'standard advances'
shall be 0.40 per cent.
The provisions should be made on the basis of classification of assets into four
different categories as stated above i.e. standard, substandard, doubtful & loss
assets. C Doubtful Upto One year NPA upto 24 months 100% on unsecured portion
& 25% on realizable value of Assets. years months realizable value of assets.
 PROVISIONS FOR NPA’s
Objectives
 The R B I. introduced the NPA norms relying on the Narsimham Committee
recommendations & prudential norms for Income Recognition, Asset Classification and
provisioning for the advance portfolio of the banks with the intention for proper
disclosure of profit & loss and reflect the financial health of bank.

 The classification of assets has to be done on the basis of objective NPA – Asset
Classification & Income Recognition Asset Classification & Income Recognition.

 The classification of assets has to be done on the basis of objective criteria and based on
record of recovery rather than on any subjective considerations.

 The provisioning should be made on the basis of classification of assets based on the
period for which the assets has remained non performing and the availability of security
and the realisable value thereof.
 NPA’S -TYPE - IDENTIFICATION
 Term Loan - Account is treated Interest and/ or instalment remains over
due for a period of more than 90 days.
 Cash Credit & Overdraft accounts -Account is treated as NPA if it
remains out of order for a period of more than 90 days. An account is
treated as out of order if,
 The outstanding balance remains continuously in excess of
sanctioned/drawing power limit or
 •Though the outstanding balance is less than the sanctioned
limit/drawing power.
 •There are no credits continuously for more than 90 days in the account
i.e. the account is non-operative.
 •The credits during the aforesaid period in accounts are not sufficient to
cover the interest debited during the same period.
 NPA’S - TYPE - IDENTIFICATION
Type of loan Identification Bill Purchased/ Discounted -Bill remains over
due for a Discounted period of more than 90 days.
 Agricultural Advances- In case of Short duration crops, the installment of
principle or interest thereon remains overdue for two crop seasons
 • In case of long duration crops, the installment of principle or interest thereon
remains overdue for one crop season.
 NPA – Asset Classification & Income Recognition Asset Classification & Income
Recognition Non Performing Asset Identification thereon remains overdue for
one crop season.
 Liquidity facility -Remains outstanding for more than 90 days in respect of
securitization transaction.
 Derivative Transactions- Overdue receivables representing positive mark to
market value of a derivative contract remaining unpaid for a period of 90 days
from specified due date.
 After identification NPA assets are classified into four categories in view of their
status as NPA, availability of security and factors affecting the recovery of their
dues.
 NPA’S-TYPE - IDENTIFICATION
 On the basis of said classification provisions are to be made.
 Standard assets: - These are assets which are regular in paying
interest/installment & its operations are Asset Classification NPA – Asset
Classification & Income Recognition Asset Classification & Income
Recognition normal.
 Sub-standard assets: - If the loan is NPA upto 12 months the same is called
Sub Standard Assets
 Doubtful assets: - If an asset is a sub-standard asset for a period exceeding 12
months, it should be classified as doubtful asset.
 The said doubtful assets are further classified age-wise i.e.
 doubtful assets upto 1 year, 1to 3 years & over three years respectively.

 Doubtful Assets upto NPA 1 year -Of twenty four months
 1 to 3 years- Over twenty four month & upto forty eight month
 NPA – Asset Classification & Income Recognition Asset Classification & Income
Recognition Asset Classification
 Loss Assets :- An asset identified by Bank or by internal/external auditor/RBI
as loss assets with a little salvage value.
Overview of financial statement of banks
Balance sheet – a bank balance sheet record the assets ,
liabilities, and net worth of a bank at a point in time.
1. Capital and liabilities: capital , Reserve and surplus ,
Deposits , Borrowings , other Liabilities and Provisions.
2. Assets: cash and balances with RBI , Balances with banks and
money at call and short notice, investments , Advances ,
Fixed assets and other assets.
3. Contingent liabilities.
Income statement focuses on inflow and outflows
Profit and loss account of banking is divided into four sec:
1. Income: Interest earned , other income , expenditure
2. Profit/loss
3. Appropriations.
 Credit Administration
Financial institutions must ensure that their portfolio
is properly administered, that is, loan agreements are duly
prepared, renewal notice are sent systematically and credit
files are regularly updated.
An institution may allocate its credit administration
function to a separate department or to designated individuals
in credit operations, depending on the size and complexity of
its credit portfolio.
 Credit Delivery
The credit delivery process involves a trade-off
between the perceived default risk of the credit applicant
and potential returns from granting requested credit.
The main objectives in credit delivery is to
determine the optimal amount of credit to deliver.
Format of Bank Balance Sheet Form A
Form of Balance Sheet
Balance Sheet of….(here enter name of the Banking Company)…….
Balance Sheet as on 31st March (Year)
Particulars Schedule As on 31.3…. As on 31.3….
Current Year Previous Year

Capital and Liabilities:

Capital 1

Reserves and Surplus 2

Deposits 3

Borrowings 4

Other liabilities and Provisions 5

Total
Assets
Cash and Balances with Reserve 6
Bank of India Balance with Banks
Money at call and Short Notice 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent Liabilities 12
Bills for Collection
 Format of Profit and Loss Account
Form B
Form of Profit and Loss Account For the year ending 31 st March….
Particulars Schedule No Year ended as on 31.3…. Year ended as on 31.3….
(Current Year) (Previous Year)

1) Income

Interest earned 13

Other income 14

Total

2) Expenditure

Interest Expended 15

Operating Expenses 16

Provisions and Contingencies

Total
Particulars Schedule No Year ended as on Year ended as on 31.3….
31.3….(Current Year) (Previous Year)

3) P&L

Net P&L(-) for the yr P&L

(-) brought forward

Total

4) APPROPRIATION
Transfer to statutory
reserves

Transfer to other reserves

Transfer to
government/proposed
Dividends

Balance carried over to

B/S

Total
 CAMELS
 CAMELS is a recognized international rating system that bank supervisory
authorities use in order to rate financial institutions according to six factors
represented by its acronym. Supervisory authorities assign each bank a score on
a scale. A rating of one is considered the best, and a rating of five is considered
the worst for each factor.
 CAMELS is an international rating system used by regulatory banking
authorities to rate financial institutions, according to the six factors represented
by its acronym.
 The CAMELS acronym stands for "Capital adequacy, Asset quality,
Management, Earnings, Liquidity, and Sensitivity."
 The acronym “CAMEL” refers to the five components of a bank's

condition that are assessed: Capital adequacy, Asset quality, Management,

Earnings, and Liquidity. A sixth component, a bank's Sensitivity to market
risk, was added in 1997; hence the acronym was changed to CAMELS.
 CAMELS
Understanding the CAMELS Rating System
 Banks that are given an average score of less than two are considered to be high-quality
institutions. Banks with scores greater than three are considered to be less-than-satisfactory
institutions. The acronym CAMELS stands for the following factors that examiners use to rate
bank institutions:
Capital Adequacy
 Examiners assess institutions' capital adequacy through capital trend analysis. Examiners also
check if institutions comply with regulations pertaining to risk-based net worth requirements.
To get a high capital adequacy rating, institutions must also comply with interest and dividend
rules and practices. Other factors involved in rating and assessing an institution's capital
adequacy are its growth plans, economic environment, ability to control risk, and loan and
investment concentrations.
Asset Quality
 Asset quality covers an institutional loan's quality, which reflects the earnings of the
institution. Assessing asset quality involves rating investment risk factors the bank may face
and balance those factors against the bank's capital earnings. This shows the stability of the
bank when faced with particular risks. Examiners also check how companies are affected by
the fair market value of investments when mirrored with the bank's book value of investments.
Lastly, asset quality is reflected by the efficiency of an institution's investment policies and
practices.
 CAMELS
Management
 Management assessment determines whether an institution is able to
properly react to financial stress. This component rating is reflected by the
management's capability to point out, measure, look after and control risks
of the institution's daily activities. It covers management's ability to ensure
the safe operation of the institution as they comply with the necessary and
applicable internal and external regulations.

Earnings
 A bank's ability to produce earnings to be able to sustain its activities,
expand, remain competitive are a key factor in rating its continued viability.
Examiners determine this by assessing the bank's earnings, earnings'
growth, stability, valuation allowances, net margins, net worth level, and the
quality of the bank's existing assets.
Liquidity
To assess a bank's liquidity, examiners look at interest rate risk
sensitivity, availability of assets that can easily be converted to
cash, dependence on short-term volatile financial resources and
ALM technical competence.
Operational Condition: CAMELS rating system analyzes the
institution's liquidity position and manages risk is to ensure
sound operational condition. Managerial Condition: It also
indicates management's efficiency of handling risks, managing
sources of funds, liquidity position and earnings potential of the
institution.
Background. The NCUA adopted its current rating system,
known as CAMEL, in 1987. The current CAMEL rating is based
upon an evaluation of five critical elements of a credit union's
operations: Capital adequacy, asset quality, management,
earnings, and liquidity and asset-liability management.
THANK YOU