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It's Kslu banking law notes, Summaries of Banking Law and Practice

Karnataka State Law UniversityBanking Law and Practice

Baking law notes for kslu law students

Typology: Summaries

2022/2023

Uploaded on 02/19/2024

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Functions of Commercial Bank
An institution that provides its customers with services like accepting deposits, providing
loans, and making investments, with the objective of earning profits is known as
a Commercial Bank. A commercial bank is a primary unit of the Indian Banking System.
Some examples of commercial banks in India are Punjab National Bank (PNB), Canara Bank,
State Bank of India (SBI), Union Bank, etc. A commercial bank is the backbone of an
economy and acts as a financial intermediary between the households saving a part of their
income and the productive sector who invests money. As a financial intermediary,
commercial banks collect savings from households and lend the same to the productive
sector.
1. Accepting Deposits:
One of the most essential functions of commercial banks is accepting deposits. Commercial
banks accept deposits from their customers in different forms based on the requirements of
different sections of society. The main types of deposits include:
• Current Account Deposits: The deposits which are repayable on demand by
the banks are known as demand deposits or current account deposits. In general,
these kinds of deposits are maintained by businessmen to make transactions with
these deposits. One can get the amount deposited as demand deposits by a cheque
without any restriction. Besides, commercial banks do not pay any interest to the
depositors on these accounts; instead, they charge some amount as a service
charge for running these accounts.
• Fixed Deposits or Time Deposits: The deposits in which the depositor, deposits
money with the bank for a fixed time period are known as fixed deposits or time
deposits. These deposits do not enjoy a cheque facility and carry a high interest
rate.
• Saving Deposits: The deposits, which include combined features of demand
deposits and fixed deposits are known as saving deposits. The depositors have the
cheque facility to withdraw money from their accounts, but there are some
restrictions on the number and number of withdrawals. The restrictions are
imposed to discourage the frequent use of saving deposits. Besides, the interest
rate on saving deposits is less than the interest rate on fixed deposits.
2. Advancing of Loans:
The banks are not allowed to keep the amount deposited with them, idle. Therefore,
commercial banks have to keep some amount of the total deposits as cash reserves and lend
the rest of the balance to needy borrowers and charge interest from them. The interest
received by commercial banks from advancing loans is the main source of their income. Some
of the different types of loans and advances made by commercial banks are:
• Cash Credit: The loan given to the borrowers against their current assets like
stocks, bonds, shares, etc., is known as cash credit. For this, a credit limit is
sanctioned to the borrower, and money is credited to this account. The borrower
can now withdraw any amount at any time within his credit limit. Interest is
charged from the borrower on the amount actually withdrawn by him and not on
the entire loan amount.
• Loans:
Demand Loans: The loans given by the banks which they can recall at any time
on demand are known as demand loans. The entire amount of the demand loan is
credited to the borrower’s account, and interest is charged on that amount.
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Functions of Commercial Bank An institution that provides its customers with services like accepting deposits, providing loans, and making investments, with the objective of earning profits is known as a Commercial Bank. A commercial bank is a primary unit of the Indian Banking System. Some examples of commercial banks in India are Punjab National Bank (PNB), Canara Bank, State Bank of India (SBI), Union Bank, etc. A commercial bank is the backbone of an economy and acts as a financial intermediary between the households saving a part of their income and the productive sector who invests money. As a financial intermediary, commercial banks collect savings from households and lend the same to the productive sector.

1. Accepting Deposits: One of the most essential functions of commercial banks is accepting deposits. Commercial banks accept deposits from their customers in different forms based on the requirements of different sections of society. The main types of deposits include: - Current Account Deposits: The deposits which are repayable on demand by the banks are known as demand deposits or current account deposits. In general, these kinds of deposits are maintained by businessmen to make transactions with these deposits. One can get the amount deposited as demand deposits by a cheque without any restriction. Besides, commercial banks do not pay any interest to the depositors on these accounts; instead, they charge some amount as a service charge for running these accounts. - Fixed Deposits or Time Deposits: The deposits in which the depositor, deposits money with the bank for a fixed time period are known as fixed deposits or time deposits. These deposits do not enjoy a cheque facility and carry a high interest rate. - Saving Deposits: The deposits, which include combined features of demand deposits and fixed deposits are known as saving deposits. The depositors have the cheque facility to withdraw money from their accounts, but there are some restrictions on the number and number of withdrawals. The restrictions are imposed to discourage the frequent use of saving deposits. Besides, the interest rate on saving deposits is less than the interest rate on fixed deposits. 2. Advancing of Loans: The banks are not allowed to keep the amount deposited with them, idle. Therefore, commercial banks have to keep some amount of the total deposits as cash reserves and lend the rest of the balance to needy borrowers and charge interest from them. The interest received by commercial banks from advancing loans is the main source of their income. Some of the different types of loans and advances made by commercial banks are: - Cash Credit: The loan given to the borrowers against their current assets like stocks, bonds, shares, etc., is known as cash credit. For this, a credit limit is sanctioned to the borrower, and money is credited to this account. The borrower can now withdraw any amount at any time within his credit limit. Interest is charged from the borrower on the amount actually withdrawn by him and not on the entire loan amount. - Loans: Demand Loans: The loans given by the banks which they can recall at any time on demand are known as demand loans. The entire amount of the demand loan is credited to the borrower’s account, and interest is charged on that amount.

Short-term Loans: Personal loans given to borrowers against some collateral securities are known as short-term loans. The amount taken as a loan is credited to the account of the borrower, and he can withdraw that money from his account. Interest is charged on the entire sum of the loan granted.

  • Overdraft Facility: A facility that allows the customer to overdraw from the amount of his current account up to an agreed limit is known as an overdraft facility. In general, an overdraft facility is given to respectable and reliable customers for a short period. Besides, the customers must pay interest on the amount overdrawn by them.
  • Discounting Bills of Exchange : A facility in which the holder of a bill of exchange before its maturity date can get the bill discounted with the bank. The bank pays the amount to the holder after deducting some amount as commission. Now, on the date of maturity, the party which has accepted the bill pays back the money to the bank. 3. Agency Functions: There are some agency functions performed by commercial banks for which they charge some commission from their clients. Some of these functions are:
  • Transfer of Funds: With the help of instruments like mail transfers, demand drafts, etc., commercial banks provide their customers with the facility of easy and economical remittance of funds from one place to another.
  • Collection and Payment of Various Items: Commercial banks provide their customers with the service of collecting bills, interest, subscriptions, rents, and other periodical receipts on their behalf. They also make payments for insurance premiums, taxes, etc., on their customer’s standing instructions.
  • Purchase and Sale of Foreign Exchange: The central bank gives authority to commercial banks to deal in foreign exchange. Commercial banks, on the behalf of their customers, buy and sell foreign exchange and also helps in promoting international trade.
  • Purchase and Sale of the Securities: Commercial banks on behalf of their customers, purchase and sell government securities and stocks and shares of private companies.
  • Income Tax Consultancy: Commercial banks provide advice to their customers related to income tax. They also help them in the preparation of their income tax returns.
  • Trustee and Executor: Commercial banks play the role of a trustee and preserve the will of their customers and as an executor, execute the will after their death.
  • Letters of Reference: Commercial banks provide information about the economic position of their customers to the traders. 4. General Utility Functions: Some of the general utility functions performed by commercial banks are:
  • Locker Facility: Commercial banks provide their customers with the facility of lockers or safety vaults so they can keep their valuable things in safe custody.
  • Traveller’s Cheques: To avoid the risk of taking cash on their journey, commercial banks provide their customers with the facility of traveller’s cheques.
  • Letter of Credit: Sometimes people need to show their creditworthiness for various reasons. Commercial banks certify the creditworthiness of their customers whenever required.
  • I.D.F.C. Bank
  • South Indian Bank b) Public Sector Banks A public sector bank is a nationalized bank, and it accounts for more than 75% of the total banking sector in the country. They are banks with a majority of the stakes held by the government. Here is a list of public sector banks in India:
  1. Bank of Maharashtra
  2. Indian Bank
  3. Bank of Baroda
  4. Canara Bank
  5. State Bank of India c.) Foreign Banks A foreign bank is a bank with its headquarters in a foreign country but also operates in other parts of the country as a private entity. These banks need to follow the regulations of the home country as well as the country where they operate. Here is a list of foreign banks that operate in India:
  6. Australia and New Zealand Banking Group Ltd.
  7. National Australia Bank
  8. Westpac Banking Corporation
  9. Bank of Bahrain & Kuwait BSC d.) Regional Rural Banks: -
  • The RRBs, also known as the Regional Rural banks, fall under sub-class commercial banks that provide only loans for agriculture and allied activities. These banks are established under the RRB act of 1976 and are a joint venture of the Central Government, State Government, and Commercial banks. These banks’ main aim is only to focus on provisions to lending and banking facilities for people across rural areas.
  • Some of RRB examples include Andhra Pragathi Grameena Bank in AP under the sponsorship of Syndicate bank, Bihar Gramin Bank in Bihar under the sponsorship of UCO bank.

Developmental Banks

  • Development banks are financial institutions that provide long-term credit for capital- intensive investments with long payback periods, such as urban infrastructure, mining and heavy industry, and irrigation systems.
  • Such banks frequently lend at low and stable interest rates in order to encourage long-term investments with significant social benefits.
  • Term-lending institutions and development finance institutions (DFIs) are other names for development banks. Development Bank/DFI Important information regarding DFI IFCI
  • It is India's first DFI. The Industrial Corporation of India was founded in 1948.
  • This was later renamed as Industrial Financial Corporation of India.
  • It operated under the jurisdiction of the Ministry of Finance, Government of India. ICICI
  • The World Bank's initiative resulted in the establishment of the Industrial Credit and Investment Corporation of India Limited in
  • In 1994, it established its subsidiary company, ICICI Bank Limited.
  • ICICI Limited was merged into ICICI Bank Limited in 2002, making it the country's first universal bank. IDBI
  • The Industrial Development Bank of India was established in 1964 by the Reserve Bank of India and was granted autonomy in 1976.
  • It is in charge of ensuring an adequate flow of credit to various sectors.
  • In 2003, it was transformed into a Universal Bank. IRCI
  • In 1971, the Industrial Reconstruction Corporation of India (IRCI) was established.
  • It was established to resurrect weak units and provide financial and technical assistance. SIDBI
  • SIDBI, or the Small Industries Development Bank of India, was founded in 1989.
  • IDBI established it as a subsidiary.
  • In 1998, it was granted autonomy. EXIM Bank
  • EXIM Bank – Export-Import Bank – was founded in January 1982 and is the premier institution for foreign trade investment.
  • A few examples of Small Finance Banks include AU Small finance bank, Equitas small finance bank, Fincare small finance bank, etc. Payments Bank: -
  • Based on the recommendations of the Nachiket Mor Committee, Payments Bank was set up to operate on a smaller scale with minimal credit risk.
  • The main objective is to advance financial inclusion by offering banking and financial services to the unbanked and underbanked areas, helping the migrant labour force, low- income households, small entrepreneurs etc.
  • They are registered under the Companies Act 2013 but are governed by a host of legislations such as Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange Management Act, 1999, Payment and Settlement Systems Act, 2007 and the like.
  • India currently has 6 Payment Banks namely, Airtel Payment Bank, India Post Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank and Jio Payment Bank.
  • Payment banks can take deposits up to Rs. 1,00,000. It can accept demand deposits in the form of savings and current accounts.
  • The money received as deposits can be invested in secure government securities only in the form of Statutory Liquidity Ratio (SLR). This must amount to 75% of the demand deposit balance. The remaining 25% is to be placed as time deposits with other scheduled commercial banks.
  • It can issue debit cards.
  • Payment banks receive a ‘differentiated’ bank license from the RBI and hence cannot lend.
  • Payment banks cannot issue credit cards.
  • It cannot accept time deposits or NRI deposits.
  • It cannot issue loans.
  • It cannot set up subsidiaries to undertake non-banking financial activities. Local Area Banks:-
  • The Local area banks are introduced only around 1996 as the main objective to run only in local areas to generate profits. Commercial private sector banks manage these banks. However, not many local area banks are there in India.
  • Each local Area bank is registered as a public limited company under the Companies Act, 1956. However, they are licensed under the Banking Regulation Act, 1949.
  • The Local Area Banks are the only type of Non-scheduled Banks of India. However, they are eligible to be included in the Second Schedule of the RBI Act 1934 subject to eligibility criteria of RBI.
  • Local Area Banks have jurisdiction over a maximum of three contiguous districts, and their basic function is to mobilise funds in rural and semi-urban areas.
  • The minimum start-up capital of a LAB was fixed at Rs.5 crore
  • Each Local Area Bank is allowed to open branch in only one urban centre per District and rest of the branches were allowed to be opened in the rural and semi urban centres subject to requisite clearance in respect of rural branches from the District Consultative Committee.

Functions of Local Area Banks

  • The Local Area Banks can do all normal banking business, but their major function was to finance agriculture and allied activities, small scale industries, agro-industries and trading / non-farm activities in the rural and semi-urban areas.
  • These banks had to give out 40% of total credit to priority sector, of which 10% is to be given to weaker sections of the society.
  • Some of them include Coastal Local Area Bank in Andhra Pradesh, Subhadra Local area bank in Kolhapur, Capital Local area bank in Punjab, and Krishna Bhima Samruddhi Local area bank in Telangana. Functions of RBI Functions of RBI can be classified into following categories: a) Traditional functions b) Development functions c) Supervisory functions (A) TRADITIONAL FUNCTIONS OF RBI 1. Issue of Currency Notes As per the provisions of the Section 22 of the Reserve Bank of India Act 1934 the RBI has sole right or authority to issue currency notes except one rupee note and coins of smaller denomination. RBI can exchange these currency notes for other denominations. RBI issues these currency notes ( 2, 5, 10, 20, 50, 100, 500, 1000) against the security of gold bullion, foreign securities, rupee coins, exchange bills, promissory notes and government of India bonds etc. The Reserve Bank has a monopoly for printing the currency notes in the country. It has the sole right to issue currency notes of various denominations except one rupee note (which is issued by the Ministry of Finance). The Reserve Bank has adopted the Minimum Reserve System for issuing/printing the currency notes. Since 1957, it maintains gold and foreign exchange reserves of Rs. 200 Cr. of which at least Rs. 115 cr. should be in gold and remaining in the foreign currencies. 2. Banker to other Banks RBI also guide, help and direct other commercial banks in the country.RBI can control the volume of bank reserves. Every commercial bank has to maintain a part of their reserves with

RBI encourages the banking and non - banking institution for maintenance of sound and healthy financial system.

2. Development of Agriculture As we know, India is an agrarian economy so RBI always give attention to agriculture sector by assessing credit needs of this sector. Regional Rural Banks (RRB), National Bank for Agriculture and Rural Development (NABARD) which are only for agriculture finance comes under the control of the RBI. 3. Industrial Finance For economic development of country, Industrial development is necessary. As we know industries includes small industries, middle industries, large scale industries etc all these industries development is necessary for overall economic development of country. For this purpose, RBI supports the industrial sector also. RBI had played the vital role for setting up of such industrial finance institutions like ICICI Limited, IDBI, SIDBI, EXIM etc. 4. Training Provision RBI always tried to provide essential training to the staff of the banking industry. RBI has set up banker's training college at several places. The training institute namely National Institute of Bank Management (NIBM), Bankers Staff College (BSC), College of Agriculture Banking (CAB) etc. 5. Data Collection RBI always collects important statistical data on several topics such as interest rates, inflation, savings, investment, deflation etc. This data is very much useful for policy makers and researchers. 6. Publication of the Reports RBI has its separate publication division. This division collect and publish data on different sector of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI annual reports, Report on Trend and Progress of commercial banks. This information is made available to the public also at cheaper rates. 7. Promotion of Banking Habits RBI always takes necessary steps to promote the banking habits among people for economic development of country. RBI has set up many institutions such as Deposit Insurance Corporation 1962, UTI 1964, IDBI 1964, NABARD 1982, NHB 1988 etc. These organizations develop and promote the banking habits among the people. 8. Export Promotion

RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The Export - Import Bank of India (EXIM), and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose. (C) SUPERVISORY FUNCTIONS The supervisory functions of RBI are discussed as under:

1. Granting Licence to Banks RBI grants licence to banks for carrying its business. RBI also provide licence for opening extension counters, new branches even to close existing branches. It comes under section 22 and 23 of banking Regulation Act 1949 2. Bank Inspection RBI has power to ask for periodical information from banks on various components of assets and liabilities. 3.Control Over NBFIs The non - bank financial institutions are not influenced by the working of a monitory policy. RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs. 4. Implementation of Deposit Insurance Scheme The RBI has set up the Deposit Insurance Guarantee Corporation to protect the deposit of small depositors. All bank deposits below Rs. 5 Lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure. Indigenous Banking : Indigenous bankers constitute the ancient banking system of India. They have been carrying on their age-old banking operations in different parts of the country under different names. In Chennai, these bankers are called Chettys ; in Northern India Sahukars, Mahajans and Khatnes; in Mumbai, Shroffs and Marwaris; and in Bengal, Seths and Banias. According to the Indian Central Banking Enquiry Committee, an indigenous banker or bank is defined as an individual or private firm which receives deposits, deals in hundies or engages itself in lending money. The indigenous bankers can be divided into three categories: (a) those who deal only in banking business (e.g., Multani bankers); (b) those who combine banking business with trade (e.g., Marwaris and Bengalies); and

to produce. According to Sir Daniel Hamilton, the “secret of successful industry is to buy your finance cheap and to sell your produce dear. The Indian buys his finance dear an d sells his produce cheap. His creditor generally fixes the price for both.” Defective Lending: The indigenous bankers generally do not follow the sound banking principles while granting loans. They provide loans against insufficient securities or even against personal securities. They also extent credit against immovable properties. They also do not distinguish between short-term and long-term loans. Unproductive Loans: The indigenous bankers do not pay attention to the purpose for which the loan is used. They generally give money for unproductive and speculative activities, for paying interest or for paying off old debts. Secrecy of Accounts: The indigenous bankers keep secrecy about their accounts and activities. They neither get their accounts audited nor publish annual balance sheets. This raises suspicion in the minds of the people. Exploitation of Customers: The indigenous bankers indulge in all types of malpractices and exploit their customers in many ways: a) They make unauthorised deductions from the loans, (b) They overstate the amount of loans in the document, (c) They do not give receipt against payments received. No Control of Reserve Bank: The indigenous banking business is unregulated. The Reserve Bank of India has not control over these bankers and cannot regulate their activities. In this way, the indigenous bankers are a great hurdle in the way of creating an organised money market in the country. RBI and Indigenous Banker Indigenous Bankers and the RBI The Central Banking Enquiry Committee (1931) recognized the need to integrate the unorganized and the organized sectors of money market. The Committee suggested that the indigenous bankers should be linked with the Reserve Bank of India. In 1937, the RBI prepared a scheme for direct linking with indigenous bankers on certain conditions. They are,

  1. The indigenous bankers should have a minimum working capital or Rs. 1 lakh, which should be increased to Rs. 6 lakhs within five years.
  2. They should give up non-banking and trading activities and concentrate only on banking business.
  3. They should switch over from traditional accounting system to western accounting system, get their accounts audited by qualified auditors. They should allow their records to be inspected by the RBI. They should also submit periodic statement of affairs to the RBI.
  4. RBI should have the power to regulate the operations and business of the indigenous bankers.
  5. They should start dealing in negotiable instruments recognized by the law, and not confine themselves to hundis only.
  6. The RBI assured the indigenous bankers that it would extend all the privileges enjoyed by the scheduled banks, i.e., borrowing from the RBI, facility of rediscounting eligible securities and bills of exchange. The indigenous bankers did not accept the conditions of the RBI. They were comfortable in their traditional practices and were not attracted by the benefits offered by the RBI. The efforts made by the RBI to integrate them into the organized money market failed. Indigenous Bankers and the Banking Commission (1972) The Banking Commission (1972) also recognized the useful role played by the indigenous bankers in financing the small traders and the businessmen. These sections have generally been regulated by the commercial banks. The Commission agrees that indigenous bankers should be integrated into the organized sector through a process of institutionalization. The Commission was not in favor of linking indigenous bankers with the Reserve Bank, directly. It suggested that the RBI should only exercise indirect control over them in the form of laying down norms and guidelines issued to the commercial banks to deal with them. Commercial bankers should be required to provide resounding facilities if the latter satisfies certain conditions. The Commission also recommended that the Reserve Bank should regulate the working of the indigenous bankers. The recommendations of the Commission were ignored. NBFC Introduction
  • A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities.
  • The workings and operations of NBFCs are regulated by the RBI within the framework of the RBI Act, 1934. Under this act, it is mandatory for an NBFC to get itself registered with the RBI.
  • Investment Company (IC)
  • Infrastructure Finance Company (IFC)
  • Non-Banking Financial Company: Micro Finance Institutions (NBFC-MFI)
  • Non-Banking Financial Company-Factors (NBFC-Factors) 1. Asset Finance Company An asset finance company provides funds for procuring assets to companies that are involved in manufacturing, or other economic activities. These assets include tractors, industrial machines, automobiles, and more. It is a financial institution that facilitates the service of financing the various assets for individuals and the businesses which include machinery, heavy industrial equipment, production and farming equipment and large power generators. The income arising from there from should not less be than the 60% of its total assets. UTI AMC, ICICI AMC, BIRLA SUN LIFE AMC are few examples of asset management company. 2. Investment Company It is a financial institution whose principal business is the acquisition of securities. In a simple term, these companies take money from the public which invested in various securities and financial products. Thereafter, company deducts its operational cost from the earned profit and later distribute to shareholders. Bajaj Alliance General Insurance Company, IDFC, HDFC mutual fund are examples of some Investment company. 3. Loan Company Loan Company as its name states is a financial institution which offers loan for various purposes other than of the AMC which also includes the Housing Finance Firms. LIC finance ltd, PNB Housing Finance Firm, HDFC are some examples of the Loan companies. 4. Infrastructure Finance Company These companies provide loans for infrastructural development of projects such as energy, transport, communication, water & sanitation, and other social and commercial infrastructure. It is a Non- Banking Finance Company – a. That deploys three- fourth of its total assets in infrastructure loans b. That has a minimum Net Owned Fund of 300crores c. That has minimum ‘A’ credit rating or equivalent

Few examples are GMR infrastructure ltd, Hindustan Construction Company. 5. NBFC (Factor) These types of NBFCs in India are low. These companies usually buy loans at a much- discounted rate from lenders and after that, they adjust repayment table of the debtor to ensure facile settlement adding small profit. 6. Mortgage Company It is a financial institution where -

  • At least 90% of the business turnover is of mortgage guarantee or
  • At least 90% of the gross income is from mortgage guarantee business or
  • Net owned Fund is 100 crores 7. Micro Finance Company Micro Finance Companies in NBFC, are the companies that perform the functions as similar to Banks. Loans are offered by the Micro Finance companies to various small businesses that do not have access to the formal banking channels and are not eligible for availing loans. MFI shall qualify the following criteria –
  • 85% of qualifying assets is to be maintained all the time.
  • The loan disbursed by the Micro Finance Company to a borrower having annual income–
  1. In the rural sector not exceeding Rs 1,25,000 or
  2. Urban and semi-urban not exceeding Rs 2,00,000.
  • The amount of loan shall not exceed Rs 75,000 in the first cycle and Rs1,25,000 in subsequent cycles. However, the tenure of the loan is not less than 24 months.
  • The total indebtedness of the borrower does not exceed Rs 1,25,.
  • Loan to be provided without collateral.
  • The repayment of the loan is at the choice of the borrower (The loan can be repayable on a weekly, fortnightly, or monthly basis) Conditions to Register as NBFC There are a few requirements that the business must meet before applying to RBI for NBFC License.
  • The business should be registered as a company under the Companies Act, 1956, or
  • The minimum capital (Net Owned Fund) requirement is Rs. 2 crores.
  • The principal business of the applicant should be financial activities. If the financial flow of the business is more than 50% of the total capital asset, then that company can get NBFC registration.
  • It should have at least 1 Director from the financial field or a senior banker as a director.
  • The CIBIL (Credit Information Bureau Limited) records should be clean.
  • NBFCs cannot accept demand deposits from public depositors or investors as it is not authorised by law.
  • The minimum time for which the public deposits can be taken by the company is 12 months, while the maximum tenure can be 60 months.
  • The Reserve Bank of India will not guarantee the repayment of any amount which is taken by the NBFCs.
  • The Company cannot charge an interest rate which is more than the rate prescribed by the Reserve Bank of India.
  • NBFCs can issue cheques to their customers to make payments or settlements.
  • The company must furnish a record of the statutory return on the deposits taken by the company in the form NBS- 1 every year.
  • The company must furnish a quarterly return on the liquid assets of the company.
  • The audited balance sheet of the company must be submitted every year.
  • The company must ascertain its credit ratings every 6 months and submit the same to the RBI.
  • The depositors of the NBFCs cannot avail the securing facility of the Deposit Insurance and Credit Guarantee Corporation (DICGC).
  • The RBI has restricted the NBFCs from providing additional benefits, extra incentives, or gifts to the customers or depositors, than those which are offered by the banks.
  • The company must maintain a minimum of 15% of the Public Deposits in its Liquid Assets. Nationalisation of Banks:
  • Nationalization of banks is the process of converting a private stake into a public stake, essentially increasing the government's share of the banking sector. The primary goal of this move was to reduce the concentration of power and wealth in the hands of a few families who owned and controlled these financial institutions.
  • With the nationalisation of the Imperial Bank of RBI in 1955 , the central government entered the banking business, taking a 60% stake and forming a new bank, SBI. The nationalisation of banks broadened the scope of public sector banking, which had previously been limited to the State Bank of India. What is Nationalisation of Banks?
  • The nationalisation of banks altered the history of India's banking system.
  • At the time of India's independence, all of the country's major banks were privately led, which was a source of concern because people in rural areas were still reliant on money lenders for financial assistance.
  • To address this issue, the then-Government decided to nationalise the banks. The Banking Regulation Act of 1949 was used to nationalise these banks.
  • The Reserve Bank of India, on the other hand, was nationalised in 1949.
  • Following the formation of the State Bank of India in 1955, another 14 banks were nationalised between 1969 and 1991. These were the banks with more than 50 crores in national deposits.
  • The 14 largest commercial banks were nationalised by then-Prime Minister Indira Gandhi in 1969.
  • Another six banks were nationalised in 1980 , bringing the total to twenty.
  • Aside from the aforementioned 20 banks, seven SBI subsidiaries were nationalised in
  • The government merged Punjab National Bank and New Bank of India in 1993. It was the only merger between nationalised banks, which reduced the number of nationalised banks from 20 to 19. Objectives of Nationalisation
  • Social Welfare :-
  • It was the need of the hour to direct the funds for the needy and required sectors of the Indian economy. Sector such as agriculture, small and village industries needed funds for their expansion and further economic development.
  • Controlling Private Monopolies:- Prior to nationalization many banks were controlled by private business houses and corporate families. It was necessary to check these monopolies to ensure a smooth supply of credit to socially desirable sections.
  • Expansion of Banking :- In a large country like India the number of banks existingthose days were certainly inadequate. It was necessary to spread banking facilities tounbanked village areas across the country.
  • Reducing Regional Imbalance In a country like India where we have urban – rural divide it was necessary for banks to go in the rural areas where the banking facilities were not available. In order to reduce this regional imbalance nationalization was justified.
  • Priority Sector Lending: - In India, the agriculture sector and its allied activities were the largest contributor to the national income. So, these were treated as the priority sectors. But unfortunately, they were deprived of their due share in the credit. Thus, Nationalization of bank was urgently needed for catering funds to them.
  • Developing Banking Habits:- In India more than 70% population used to stay in rural areas. It was necessary to develop the banking habit among such a large population. Objects of nationalization of banks observed by the Supreme Court of India in All India Bank Officers Confederation v. Union of India ( A.I.R.1989 S.C 2045)AS: The objects of the banks observed by the (Acquisition and Transfer of undertaking )Act was to nationalize the banks to render the largest good to the largest number of people. Achievements due to nationalisation of banks:
  1. Branch Expansion: Initially, the banks were conservative and opened branches mainly in cities and big towns. There has been a spectacular expansion of bank branches after nationalisation of major commercial banks. The lead bank scheme has played an important role in the bank expansion programme.
  2. Reduction in monopoly: Initially a few leading industrial and business houses had close association with commercial banks. They exploited the bank resources and