Banking Companies
Banking Companies
Banking Companies
BANKING COMPANIES
Banks are vital to the prosperity and well-being of any society or country. Banks
enable a society to create the platform for the satisfaction of wants of its people
by managing and maintaining the flow of money to carry out transactions.
For smoothly meeting cash payment requirement, banks have to maintain Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
The capital adequacy norms given in this unit are as per existing Basel II norms. The
RBI requires Banks to maintain minimum capital risk adequacy ratio at prescribed
rate on an ongoing basis.
Capital is divided into two tiers according to the characteristics/qualities of each
qualifying instrument. Tier I capital consists mainly of share capital and disclosed
reserves and it is a bank’s highest quality capital because it is fully available to cover
losses. Tier II capital on the other hand consists of certain reserves and certain types
of subordinated debt.
The Banks have to classify their advances into two broad groups: 1. Performing
Assets; 2. Non-Performing Assets. These classification is done based on the
principle laid down by the RBI in Income Recognition and Asset Classification(IRAC)
norms.
Performing assets are also called as Standard Assets. The Non-Performing Assets
is again classified into three groups and they are (i) sub-standard Assets (ii)
doubtful assets & (iii) Loss Assets.
The banks have to maintain provisioning for Non-Performing Assets at the
prescribed rates. A banking company also performs Discounting of bills; Collection
of bills and Acceptances on behalf of customers
While preparing financial statements, banks have to follow various guidelines /
directions given by RBI/Government of India governing the Financial Statements.
The chapter has been divided into 6 units for the purpose of convenience in
understanding of the topic.
LEARNING OUTCOMES
Types of Bank
Scheduled Banks in India constitute those banks which have been included in the
Second Schedule of Reserve Bank of India (RBI) Act, 1934. After May 1997 there
are no non-scheduled commercial banks existing in India. However, there are small
to tiny non-scheduled Urban Co-operative Banks also known as Nidhiond Schedule
ots of the country.
The banks included in this schedule list should fulfill following two conditions:
1. The paid up capital and reserves in aggregate should not be less than ` 5
lakhs.
2. Any activity of the bank will not adversely affect the interests of depositors.
The Reserve Bank includes a bank in this schedule if it fulfils certain other conditions
too.
The RBI as the Central Bank is the ‘Bank of Last Resort’ i.e. when other commercial
banks are in trouble RBI helps them out. The services provided by RBI to scheduled
commercial banks include the following:
(a) The purchase, sale, and re-discounting of certain bills of exchange, or
promissory notes.
(b) Purchase and sale of foreign exchange.
(c) Purchase, sale and re-discounting of foreign bills of exchange.
(d) Making of loans and advances to scheduled banks.
(e) Maintenance of accounts of the scheduled bank in its banking department
and issue department.
(f) Remittance of money between different branches of scheduled banks
through the offices, branches or agencies of Reserve Bank free of cost or at
nominal rates.
1.1.2 Banking Company Business
Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in
which a banking company may engage. These are:
(i) borrowing, raising or taking up of money, lending or advancing of money
either upon or without security;
(ii) the drawing, making, accepting, discounting, buying, selling collecting and
dealing in bills of exchange, hoondees, promissory notes, coupons, drafts,
bills of lading, railway receipts, warrants, debentures, certificates, scrips and
other instruments, and securities whether transferable or negotiable or not;
(iii) the granting and issuing of letters of credit, traveller's cheques and circular
notes;
(iv) the buying, selling and dealing in bullion and species;
(v) the buying and selling of foreign exchange including foreign bank notes;
(vi) the acquiring, holding, issuing on commission, underwriting and dealing in
stock, funds, shares, debentures, debenture stock, bonds, obligations,
securities and investments of all kinds;
(vii) the purchasing and selling of bonds scrips or other forms of securities on
behalf of constituents or, others the negotiating of loans and advances;
(viii) the receiving of all kinds of bonds, scrips or valuables on deposit or for safe
custody or otherwise;
(ix) the providing of safe deposit vaults;
(x) the collecting and transmitting of money and securities;
(ix) acting as agents for any government or local authority or any other person
or persons; the carrying on of agency business of any description including
the clearing and forwarding of goods, giving of receipts and discharges and
otherwise acting as an attorney on behalf of customers, but excluding the
business of a managing agent of a company;
(x) contracting for public or private loans and negotiating and issuing the same;
(xi) the effecting, issuing, guaranteeing underwriting, participating in the
managing and carrying out of any issue public or private, of State, municipal
or other loans or of shares, stocks, debentures, debenture stock of any
company, corporation or association and the lending of money for the
purpose of any such issue.
(xii) carrying on and transacting every kind of guarantee and indemnity business.
(xiii) managing, selling and realising property which may come into the possession
of the banking company in satisfaction of its claims.
(xiv) acquiring and holding and generally dealing with any property or any right,
title or interest in such property which may form the security for any loans
and advances or which may be connected with any such security.
(xv) underwriting and executing trusts.
(xvi) undertaking the administration of estates as executor, trustee or otherwise;
(xvii) establishing and supporting or aiding in the establishment and support of
associations, institutions, funds, trusts and conveniences calculated to benefit
employees or employees of the company or the dependents or connections
of such persons; granting pensions and allowances and making payments
towards insurance; subscribing to or guaranteeing moneys for charitable or
benevolent objects or for any exhibition or for any public, general or useful
object.
(xviii)acquisition, construction, maintenance and alteration of any building and
works necessary or convenient for the purpose of the banking company.
(xix) selling, improving, managing, developing, or otherwise dealing with all or any
part of the property and rights of the company.
(xx) acquiring and undertaking whole or any part of the business of any person
or company, when such business is of a nature enumerated or described in
this subsection.
(xxi) doing all such other things as are incidental or conductive to the promotion
or advancement of the business of the banking company.
(xxii) any other form of business which the Central Government may; by notification
in the Official Gazette, specify as a form of business in which it is lawful for a
banking company to engage.
No banking company shall engage in any form of business other than those
referred to above.
To summarise all the above, the functions of Commercial Bank are:
Functions of a Commercial Bank
Some of the main functions of modern commercial banks are:
(a) Receiving of money on deposit and providing facilities to constituents for
payments by cheque.
(b) Dealing in securities on its own account and on account of customers.
(c) Lending of money by -
(i) making loans and advances,
(ii) purchasing or discounting of bills.
(d) Transferring money from place to place by -
(i) the issue of demand drafts, telegraphic transfers, traveller’s cheques,
etc.,
(ii) collection of bills.
(e) Issuing letters of credit.
(f) Safe custody of securities and valuables.
(g) Issuing guarantees.
(h) Acting as executors and trustees sometimes through subsidiary companies
formed for that purpose.
4. Co-operation.
5. Economics.
6. Finance.
7. Law.
8. Small scale industry.
9. any other matter the special knowledge of, and practical experience in, which
would, in the opinion of the Reserve Bank, be useful to the banking company.
It is also required not less than two directors should have special knowledge or
practical experience in respect of agriculture and rural economy and co-operation
or small-scale industry.
Under section 10(b)(1), every banking company shall have one of its directors as
Chairman of its board of directors. The Chairman is entrusted with the management
of the whole of the affairs of the banking company. Such Chairman is the whole-
time employee of the banking company and can hold office for a period not
exceeding five years. Other directors who are whole-time directors can hold office
continuously for a period not exceeding eight years.
(i) an amount which shall not be less than the minimum required by clause
(a); and
(ii) as soon as may be after the expiration of each year, an amount
calculated at twenty percent of its profit for that year in respect of all
business transacted through its branches in India, as disclosed in the
profit and loss account prepared with reference to that year under
section 29]
PROVIDED that any such banking company may at any time replace-
(i) any securities so deposited by cash or by any other unencumbered
approved securities or partly by cash and partly by other such securities,
so however, that the total amount deposited is not affected;
(ii) any cash so deposited by unencumbered approved securities of an
equal value.]
(3) In the case of any banking company to which the provisions of sub-section
(2) do not apply, the aggregate value of its paid-up capital and reserves shall not
be less than-
(i) if it has places of business in more than one State, five lakhs of rupees, and if
any such place or places of business is or are situated in the city of Bombay
or Calcutta or both, ten lakhs of rupees;
(ii) if it has all its places of business in one State none of which is situated in the
city of Bombay or Calcutta, one lakh of rupees in respect of its principal place
of business, plus ten thousand rupees in respect of each of its other places
of business situated in the same district in which it has its principal place of
business, plus twenty-five thousand rupees in respect of each place of
business situated elsewhere in the State otherwise than in the same district.an
aggregate value of fifty thousand rupees.
(iii) if it has all its places of business in one State, one or more of which is or are
situated in the city of Bombay or Calcutta, five lakhs of rupees, plus twenty-
five thousand rupees in respect of each place of business situated outside
the city of Bombay or Calcutta, as the case may be.
(4) Any amount deposited and kept deposited with the Reserve Bank by any
banking company incorporated [outside India] shall, in the event of the company
ceasing for any reason to carry on banking business [in India], be an asset of
the company on which the claims of all the creditors of the company [in India]
shall be a first charge.
Regulation relating to authorized capital, subscribed capital and paid-up
capital (Section 12): The subscribed capital of a banking company carrying on
business in India shall not be less than one-half of the authorised capital and the
paid-up capital shall not be less than one-half of the subscribed capital. The capital
of the banking company consists of ordinary shares only; or of ordinary shares or
equity shares and such preference shares which have been issued prior to the first
day of July, 1944. The voting right of any single shareholder on a poll cannot exceed
10% of the total voting rights.
Restriction on commission, brokerage, discount, etc., on sale of shares: Under
section 13 of the Banking Regulation Act, 1949, a banking company cannot pay out
directly or indirectly commission, brokerage, discount, or remuneration in respect
of any shares issued by it, an amount exceeding two and one-half per cent of the
paid-up value of such shares.
against letters of credit, if not payable on demand, deposits held as securities for
advances which are not payable on demand and Gold deposits.
Other Demand and Time Liabilities (ODTL)
ODTL include interest accrued on deposits, bills payable, unpaid dividends,
suspense account balances representing amounts due to other banks or public, net
credit balances in branch adjustment account, any amounts due to the banking
system which are not in the nature of deposits or borrowing. Such liabilities may
arise due to items like (i) collection of bills on behalf of other banks, (ii) interest due
to other banks and so on. If a bank cannot segregate the liabilities to the banking
system, from the total of ODTL, the entire ODTL may be shown against item II (c)
'Other Demand and Time Liabilities' of the return in Form 'A' and average CRR
maintained on it by all SCBs.
Participation Certificates issued to other banks, the balances outstanding in the
blocked account pertaining to segregated outstanding credit entries for more than
5 years in inter-branch adjustment account, the margin money on bills purchased/
discounted and gold borrowed by banks from abroad, also should be included in
ODTL.
Cash collaterals received under collateralized derivative transactions should be
included in the bank’s DTL/NDTL for the purpose of reserve requirements as these
are in the nature of ‘outside liabilities’.
(b) That the affairs of the company are not being conducted or are not likely to
be conducted in a manner detrimental to the interest of its present or future
depositors.
(c) That the general character of the proposed management of the company will
not be prejudicial to the public interest or the interest of its depositors.
(d) That the company has adequate capital structure and earning prospects.
(e) That the public interest will be served by the grant of a licence to the company
to carry on banking business in India.
(f) That having regard to the banking facilities available in the proposed principal
area of operations of the company, the potential scope for expansion of
banks already in existence in the area and other relevant factors, the grant of
the licence would not be prejudicial to the operation and consolidation of the
banking system consistent with monetary stability and economic growth.
Similarly, prior permission of the Reserve Bank of India is necessary to open a new
branch of bank in India or to change the existing place of business situated in India.
Also, no banking company incorporated in India can open a branch outside India
or change the existing place of business without prior permission of the Reserve
Bank of India.
Provided that the provision mentioned in above paragraph shall not apply to the
opening for a period not exceeding one month of a temporary place of business
within a city, town or village or the environs thereof within which the banking
company already has a place of business, for the purpose of affording banking
facilities to the public on the occasion of an exhibition, a conference or a mela or
any other like occasion.
The above assets have to be held at the close of business on any day and shall be
valued at a price not exceeding the current market price of the above assets.
The percentage of SLR is changed by the Reserve Bank of India from time to time
considering the general economic conditions. This is in addition to the Cash
Reserve Ratio balance which a scheduled bank is required to maintain under
Section 42 of the Reserve Bank of India Act.
Maintenance of Statutory Liquidity Ratio (SLR)
In exercise of the powers conferred by sub-section (2A) of Section 24 read with
Section 51 and Section 56 of the Banking Regulation Act, 1949 (10 of 1949) and in
supersession of the notifications DBR.No.Ret.BC.14/12.02.001/2016-17 dated
October 13, 2016 BR.NDBR.No.Ret.BC.91/12.02.001/2017-18 dated October 04,
2017, the Reserve Bank hereby specifies that:
(i) 19.25 per cent from January 5, 2019
(ii) 19.00 per cent from April 13, 2019
(iii) 18.75 per cent from July 6, 2019
(iv) 18.50 per cent from October 12, 2019
(v) 18.25 per cent from January 4, 2020
(vi) 18.00 per cent from April 11, 2020
of their total net demand and time liabilities in India as on the last Friday of the
second preceding fortnight, valued in accordance with the method of valuation
specified by the Reserve Bank from time to time; and Such SLR assets shall be
maintained by Scheduled Commercial Banks (Including Regional Rural Banks), Local
Area Banks, Small Finance Banks and Payments Banks, as -
(a) cash; or
(b) gold as defined in Section 5(g) of the Banking Regulation Act, 1949 (10 of
1949) valued at a price not exceeding the current market price: or
(c) unencumbered investment in any of the following instruments [hereinafter
referred to as Statutory Liquidity Ratio securities (arket price: or Payments Ban
Dated securities of the Government of India issued from time to time under the
Market Borrowing Programme and the Market Stabilization Scheme ; or Treasury
Bills of the Government of India; or State Development Loans (SDLs) of the State
Governments issued from time to time under the market borrowing programme:
(d) the deposit and unencumbered approved securities required, under sub-
section (2) of section 11 of the Banking Regulation Act, 1949(10 of 1949), to be
made with the Reserve Bank by a banking company incorporated outside India;
(e) any balance maintained by a scheduled bank with the Reserve Bank in excess
of the balance required to be maintained by it under section 42 of the Reserve Bank
of India Act,1934 (2 of 1934);
Following securities shall not be treated as encumbered for the purpose of
maintenance of SLR assets, namely:-
(a) securities lodged with another institution for an advance or any other credit
arrangement to the extent to which such securities have not been drawn
against or availed of;
(b) securities offered as collateral to the Reserve Bank for availing liquidity
assistance under Marginal Standing Facility (MSF), up to the permissible
percentage of the total NDTL in India, carved out of the required SLR portfolio
of the bank concerned; and
(c) securities offered as collateral to the Reserve Bank for availing liquidity
assistance under Facility to Avail Liquidity for Liquidity Coverage Ratio
(FALLCR).
owner of an amount not exceeding 30% of the paid-up share capital of that company
or 30% of its own paid-up share capital and reserves, whichever is less.
been operated for 10 years. This report is to be submitted within 30 days after the
close of each calendar year. In case of fixed deposit, such 10 years are to be
reckoned from the date of expiry of the fixed deposit period.
Under Section 26A of the Banking Regulation Act, the Reserve Bank of India has
established a Fund to be called the "Depositor Education and Awareness Fund”. Every
Banking Company needs to credit to the Fund the amount to the credit of any account
in India with a banking company which has not been operated upon for a period of
ten years or any deposit or any amount remaining unclaimed for more than ten years,
within a period of three months from the expiry of the said period of ten years.
1.15 ACCOUNTS
At the end of each calendar year or at the expiration of twelve months ending on such
date as the Central Government may specify in this regard, every banking company
incorporated in India, in respect of business transacted by it, and every banking
company incorporated outside India, in respect of business transacted by its branches
in India, shall prepare with reference to that year or period, a Balance Sheet (Form A)
and Profit and Loss Account (Form B) as on the last working day of that year or the
period in the forms set out in the Third Schedule of Banking Regulation Act.
The Balance Sheet and the Profit and Loss Account must be signed by the manager
or principal officer and by at least three directors or all directors if there are not
more than three directors in case of a banking company incorporated in India. In
case of a banking company incorporated outside India, the statement of accounts
must be signed by the manager or agent of the principal office of the company in
India. In addition to the above, the Reserve Bank of India has also issued Master
Circular on Disclosures to be made in the Financial Statement of these Companies.