• Module-1

Definition of a Bank

“Bank is a financial intermediary institution which deals in loans and advances” --- Cairn
Cross.

• Bank is an institution which collects idle money temporarily from the public and lends to
other people as per need.” ---- R.P. Kent.

• “Bank is an institution which creates money by money only.” -----W. Hock. “

• Bank is a financial institution which collects money in current, savings or fixed deposit
account; collects cheques as deposits and pays money from the depositors account through
cheques. -----Sir John Paget.

Definition of Banking

• S 5(b) of the Banking Regulation Act 1949 “banking” means the accepting, for the purpose
of lending or investment, deposits of money from the public, repayable on demand and
withdrawable by cheque, draft, and order or otherwise.

• S.5(c)-Banking company means any company which transacts the business of banking in
India. No company can carry on the business of banking in India unless it uses as part of its
name at least one of the words bank, banker or banking.

• The essential characteristics of the banking business as defined in S 5(b) are the following
two:

• Acceptance of deposits from the public, for the purpose of lending or investment.

• Deposit is withdrawable by means of any instrument whether a cheque or otherwise.

Objectives of Banking

• Establish an institution for maximizing profits and to conduct overall economic activity.

• Collect savings or idle money from the public at a lower rate of interests and lend these
public money at a higher rate of interests.

• Create propensity of savings amongst the people and build up capital through savings..

• Motivate people for investing money with a view to bringing solvency in them

• Expedite investment and extend services to the customers.

• Maintain economic stability by means of controlling money market.

• Extend co-operation and advices to the Govt. on economic issues and assist government
for trade, business and socio economic development.

Origin

• The word bank is derived from the word ‘bancus’ or ‘banque’ i.e, a bench.

• Early bankers, the Jews transacted their business on benches in the market place.
 • Some others is of the view that the word ‘bank’ is derived from the German word ‘back’
meaning a joint-stock fund, which was Italianized into banco.

• The history of banking in Europe can be traced to Middle Ages.

Central Bank of India-RBI

• Originally started as a shareholder’s bank it took over functions of currency issue from the
GOI and the power of credit control and responsibilities of central bank from the Imperial
bank of India.
• Monitor & control the banking structure supervises & regulates the activities of the entire
banking sector.
• Nationalised in 1949.

Functions of RBI

• The RBI should maintain a close and continuous relationship with the Union Government
while implementing the policies. If any differences arise, the government’s decision will be
final.
• Welfare of the public
• To maintain the financial stability of the country.
• To develop the financial infrastructure of the country.
• To allocate the funds effectively.
• To regulate the overall credit volume for price stability.

Comparison between Central Bank & Commercial Bank

• Formation- • Commercial Bank is formed on the

Central Bank is the sole banking Institution basis of Banking Company Laws.
which is established through ordinance or
special law of the Government.

• Ownership- • Commercial Bank is established under

Central Bank is established under Government private Ownership.
ownership.

• Purpose- • The main purpose of commercial bank

To earn profit is not the main purpose of is to earn profit. Recovery of loan is
central bank. Its main purpose is to control the main aspect for generation of
credit system and money market. profits.
.

• Number-  In a country there are many

In a country there is only one Central Bank commercial banks.
• Control –Central bank is conducted • Commercial Bank is conducted under
exclusively under Government control. central bank’s control

• Government Influence -Government • Government has indirect influence On

has direct influence on Central Bank. Commercial Bank through Central
Bank.
Currency Market -Central Bank organizes, • Commercial Banks are the members of
controls and administers currency market the currency market.

 Representative-Central Bank • Commercial Bank represents the

represents the country or state. Customers.

• Foreign Branch -Central Bank has no • Commercial Bank may have many
branch abroad. Branches abroad.
•
• Note issue -Note issue is the primary • Cannot issue notes.
function of central bank.

• Credit control -Central Bank controls • Commercial Bank assists central bank
credit. in controlling credit.

• Clearing House-Central Bank acts as a • Commercial banks are the members of

clearing house for settlement of inter- the clearing house. They settle
bank transactions. transactions through clearing house.

• Lender of last resort-In case of any • Commercial Bank gets assistance from
crisis, central bank acts as last resort central bank in case of need.
and lends to commercial banks.
•
• Nature Of work -Central bank is not • Commercial bank is engaged in
engaged in general banking activities receiving deposits, paying money,
i.e. to receive deposits, to lend, to creating loan etc.
create loan etc.
• Development work -Central Bank • Commercial bank participates in the
formulates policy on development development program initiated by the
Work. central bank.
•

RBI Control over Banks-Main section under Banking Regulation Act

• S 17-Banking Co shall transfer each year not less than 20% of its profits to the Reserve
fund.

• S 21-Power of RBI to control advances by banking companies and directives on loan

policies.

• S 21 A-Amendment Act of 1984-Rate of interest charged not subject to scrutiny of courts-

SBI v. Yasangi Venkiteswara Rao (applicable to all banks whether agricultural or non
agricultural)

• Constitutional validity of S 21 A was challenged in Krishna Reddy v.Canara Bank, PNB v.

Shishu. (compound interest on mortgage loan)

• Central Bank of India v. Ravindra- Order 34 Rule 11 of CPC-general provision regulating

grant of interest from the date of the suit till the date of realization in the case of mortgage
suits.
• S21A not to override CPC for pendente lite interest & post decree-N.M Veerappa v. Canara
Bank.(court can use it discretion & reduce the interest rates from the date of suit till
realization of the decree.)

• Jayanth Varma & Ors v. UOI & Ors-2018Constitutional validity of S 21 A of the banking
Regulation Act was again upheld.

• S 22- No Co shall carry on banking business in India unless it holds a license issued by the
RBI and such license may be issued subject to such conditions as the RBI deems fit.

• S.23-opening of new, transfer of existing place of business.

• S.24,25-Maintenance of a percentage of assets.

• S.27-Submission of monthly return.

• S 32- Submission of accounts and balance sheet.

• S.35-Inspection of banking co books & accounts.

• S.35 A-power of RBI to give directions.

• S 35A-RBI circulars & directives on interests binding on banks-

Indian bank v. M.S Prabhu. (violations -penalized-47 A of the BR Act)

• S 36-further powers to prohibit against entering into any transaction.

• S 44 A-assist in amalgamation of banking company.

• S 36 B-Power of control over management

• S 36 AE-Acquisition of undertaking of banking co.

• S37 to 45-power as to suspension and winding up of banking companies.

• S 44 A,B-power as to reconstruction and amalgamation of banking companies.

• Social Control on Banks

• The aim of social control of banks was to bring a socialist pattern of society, decentralize
credit and to provide priority sectors with liberal banking facilities.

• Social control of banking companies was brought by an Amending Act (No.58 of 1968) by
amending Banking Regulation Act of 1949, which came into force in 1969.

• Social control was brought through two steps-firstly by setting up of National Credit Council
and secondly by introducing changes in the management. (BOD)

Nationalization of Banks-Need

• To avoid concentration of wealth & economic power.

• To bring branch expansion in unbanked areas.

• To prevent the neglect of agriculture, small scale industries & other deserving sectors.

• To prevent various mal practices happening in the banking sector.

• To bring better government control over nationalized banks.

• 1970-14 major commercial banks were nationalized-Banking Companies(Acquisition and

Transfer of undertakings Act, 1970)

• 1980- 6 more banks were nationalized Banking companies (Acquisition and transfer of
undertakings Act,1980).

• Scheduled Banks- include Commercial Banks & Co-operative Banks.

• S 2(e) of the RBI Act 1934 defines Scheduled banks as bank included in the Second Schedule
of the Act.

• Conditions

• Paid up capital & reserves of an aggregate value of not less than 5 lakh rupees

• Satisfies the RBI that its affairs are not being conducted in a manner detrimental to the
interests of its depositors

• It is a Co-operative Bank or a Company as defined in S 3 of the Companies Act 1956 or any

institution notified by the Central Govt in this behalf or a corporation or company
incorporated by or under any law in force.

• Application of Banking Regulation Act to Co-operative Societies.

• BR Act was amended in 1965 by which Part V was added & a new section- S56 was
provided.

• Cooperative Society as defined in S 2(f) includes:

• -A society registered under the Cooperative Society’s Act 1912

• -A society registered in any state under any other law relating to cooperative societies for
the time being in force in any state.

• According to BR Act for the grant of license to the applicant co-operative society, to carry
on banking business, it has to first come within the meaning of a co-operative bank i.e. the
State Co-operative bank, district Co-operative bank or a primary Co-operative bank.

• Thus, RBI by virtue of its power u/s 22 can grant a license to any co-operative bank if it is a

–State Co-operative bank, District co-operative bank or a primary co-operative bank.

• -There must be a declaration by NABARD Act, Without this declaration no license can be
issued by the RBI.