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Legal Framework of Regulation of Banks

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Banking means acceptance of deposits of money from the public for lending or investment.

Such deposits may be repayable on demand or may be for a period of time as agreed to, by the

banker and the customer, and may be repayable by cheque, draft or otherwise.

Apart from banking, banks are authorised to carry on other business as specified in Section 6 of

the Banking Regulation Act.

Banks are, however, prohibited from undertaking any trading activities.

Banks are constituted as companies registered under the Companies Act, 1956, statutory

corporations constituted under Special Statutes or Co-operative societies registered under the

Central or State Co-operative Societies Acts. The extent of applicability of the regulatory

provisions under the Banking Regulation Act and the Reserve Bank of India Act to a bank

depends on the constitution of the bank.

Reserve Bank of India is the central bank of the country and the primary regulator for the

banking sector.

The government has direct and indirect control over banks. It can exercise indirect control

through the Reserve Bank and also act directly in appeals arising from decisions of the Reserve

Bank under the various provisions of the Banking Regulation Act.

In public sector banks like the State Bank of India and its subsidiaries, nationalised banks and

the regional rural banks, 50% or more of their shares are held by the Central Government.

Central Government has substantial control over the management of these banks. Only certain

provisions of the BR Act are applicable to these banks as indicated in that Act.

Co-operative banks operating in one state only are registered under the State Co-operative

Societies Act and are subject to the control of the State Government as also the Reserve Bank.

In the case of non-banking business of the banks, they are subject to control by other

regulatory agencies.

Constitution Of Bank

Banks in India fall under one of the following categories:

1. Body corporate constituted under a special statute;

2. Company registered under Companies Act, 1956 / foreign company

3. Cooperative Society registered under a central and state enactment on cooperative societies.

Reserve Bank as Central Bank

The Reserve Bank was constituted under Section 3 of RBI Act. The Central Govt holds the whole

capital of RBI.

1. Regulating the issue of bank notes

2. Keeping of reserves for ensuring monetary stability

3. Generally to operate the currency and credit system of the country to its advantage.

RBI: Regulator and Supervisor

1. Power to License

2. Power to appointment and removal of banking boards/personnel

3. Power to regulate the business of banks

4. Power to give directions

5. Power to inspect and supervise banks

6. Power regarding audit of banks

Government as a Regulator of Banks

The Reserve Bank is primary regulator of banks. But Central govt. has also been conferred

extensive powers under the RBI Act and the BR Act either directly or indirectly over the banks.

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