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LAW OF BANKING:
QUESTIONS FROM 2015 ONWARDS
1. Briefly discuss the main functions of Reserve Bank of INDIA with regard to the
following-
a). Regulation of Currency.

b). Banker to the Government and Banker's Bank

c). Bank rate.

2. a) Explain the meaning of the term bank State the main functions of the bank
regarding lending of money and accepting deposits from the public.

b) Discuss the main functions of Banking Regulation Act ,1949, regarding Licensing of
Banking Companies and Power of Bank to acquire undertakings.

3. Discuss the relationship between banker and customer. State the protection available
to the collecting banker under the Negotiable Instrument Act. Under what circumstances
the relation between the banker and customer is terminated.

4. State the provisions relating to winding up of banking companies under Banking

Regulation Act. What kind of systematic measures should be adopted for preventing
winding up of Banking Companies.

Q.5. Write notes on any three of the following-

a) Privileges of Holder in Due course.

b) Presentment for Acceptance and Payment.

c) Legal Perspectives of Automation.

d) Automatic Teller machine and use of internet.

e) Banker's Right to claim over securities and set off.

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Q: 6 Briefly discuss the historical perspective indigenous banking sector in India and
elsewhere. State the different kinds of banks, multiple functions their growth and legal
issues.

Q: 7 Discuss the legal implications of recovery of money lent to borrowers. State the
precautionary measures to be adopted by the banks prior to sanctioning of loans.

Q: 8 Write Short note on:

a) Functions of Reserve Bank of India.

b) Presumptions as to Negotiable Instrument.

c) Smart Card and Debit Card

d) Control of RBI over Non-Banking Companies.

e) Legal aspects of Automation.

Q.9 Write notes on any three of the following:

a) Features of Promissory Notes and Bill of Exchange

b) Banker's Right to claim over securities and set off.

c) Powers and Functions of Reserve Bank of India.

d) Powers and Functions of Debt Recovery Tribunal.

e) Reconstruction and Reorganization of Banking Companies

Q: 10 (a) Explain the meaning of the term bank. State the main functions of the bank
regarding lending of money and accepting deposits from the public.
(b) Holder and Holder in due Course.

(c) Functions of Debt Recovery Tribunal.

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Q: 11 Short note on Good lending principles and lending to poor mass.

Q: 12 Short note on Multi - functional banks, growth and legal issues.

Q: 13 i) Define Negotiation.
ii) Write a note on kinds of instruments. Lay down the rules regarding presentment
and payment.
iii) Discuss the relationship between banker and customer.
Q:14 Short note on Banker’s Lien.

Q: 15 Short note on Good Leading Practices.

Q:16 Short note on Debt Recovery Tribunal

Q:17 Discuss the Organizational Structure of Reserve Bank of India. Its Role and
Functions.

Q: 18 Explain the Impact of Nationalization and Privatization of Bank.

Q: 19 Explain in detail the principles of Sound Leading Policies followed by the banks?

Q: 20 State the salient features of Negotiable Instruments Act, 1881 and Analyse the
recent amendments carried out in the Negotiable Instrument Act?

Q: 21 Analyse the emerging trend of Information Technology used in Banking Sector?

Q: 22 Short note on Internet and Phone Banking.

Q: 23 Short note on Duties of Banker towards Bank’s Customer.

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Q: 24 State the objective behind growth of multifunctional banks and issued faced by
them.

Q: 25 Define the term cheque. Explain its types. Discuss in detail its characteristics and
types of crossing.

Q: 26 Short note on Suspension and Winding of Banking Company

Q:27 Short note on Essentials of a valid promissory note.

Q: 28 Short note on Inchoate Instruments.

Q: 29 Short note on Bank rate policy.

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ANSWERS

1. Briefly discuss the main functions of Reserve Bank of INDIA with regard to the
following-
a). Regulation of Currency.

b). Banker to the Government and Banker's Bank

c). Bank rate. (Please see last Q. No. 29 as Complete Monetary Policy)

(Note as we have to write about Reserve Bank so, we will write all functions including history)

The Reserve Bank of India Act, 1934 is a landmark legislation that laid the foundation for the
establishment of the Reserve Bank of India (RBI), the central bank of the country. The RBI was set up
on 1st April 1935, with the primary purpose of regulating the Indian currency and monetary system.
The Act, which is still in force today, governs the functioning, powers, and responsibilities of the RBI.

The creation of the RBI was a significant step in India’s financial history, as it provided a centralized
authority for managing the country’s monetary policy, controlling inflation, stabilizing the currency,
and regulating the banking sector. Before the RBI, the monetary and banking system in India was
fragmented, with multiple currency issuers and no single regulatory body. The RBI Act aimed to bring
stability to the financial system by consolidating control under one central authority.

The scope of the RBI Act is broad, covering various aspects such as the management of currency,
monetary policy, banking supervision, foreign exchange regulation, and the development of the
financial sector. Over time, the RBI’s role has expanded to include responsibilities such as managing
public debt, ensuring financial inclusion, and promoting economic growth.

In essence, the Reserve Bank of India Act, 1934 is the legal framework that defines the powers and
functions of the RBI, making it central to India's economic and financial system. It serves as the
backbone of the country’s banking regulations, ensuring the stability and growth of the Indian
economy.
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RESERVE BANK OF INDIA ACT, 1934 – PURPOSE AND SCOPE

The Reserve Bank of India Act, 1934 is the foundational law that established the Reserve Bank of India
(RBI), which serves as the central bank of the country. The RBI plays a crucial role in regulating the
Indian financial system and implementing monetary policies to ensure economic stability and growth.
Here's a breakdown of the purpose and scope of the Reserve Bank of India Act, 1934:

Establishment of RBI as the Central Bank

a). The primary purpose of the Act is to establish the Reserve Bank of India (RBI) as the
central institution responsible for managing India’s monetary policy, regulating
and supervising the financial sector, and ensuring the stability of the banking
system.
Monetary Authority

b). The RBI was established to act as the central monetary authority in India. It is
tasked with regulating and controlling the supply of money, managing inflation,
and controlling credit in the economy. This role is crucial in maintaining price
stability and promoting economic growth.

Control Over Currency

c). The Act grants the RBI the exclusive authority to issue and manage the Indian
currency. This includes the responsibility for controlling the circulation of
banknotes and coins, ensuring the country’s currency remains stable and
secure.

Regulation of the Banking System

d). The Act enables the RBI to regulate and supervise the working of all commercial
banks in India. This includes the power to issue licenses to banks, inspect their
operations, and take corrective actions to ensure the safety and stability of the
banking sector.

Custodian of Foreign Exchange

e). The RBI is the custodian of India's foreign exchange reserves. It regulates the
foreign exchange market, manages India’s foreign reserves, and works to
stabilize the exchange rate by implementing various monetary and fiscal
measures.

Developmental Role

f). Over time, the RBI has also played a developmental role by providing financial
assistance to various sectors, including agriculture, industry, and infrastructure, in
line with the country’s economic development goals
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Functions of RBI
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2. a) Explain the meaning of the term bank State the main functions of the bank
regarding lending of money and accepting deposits from the public.
b) Discuss the main functions of Banking Regulation Act ,1949, regarding Licensing of
Banking Companies and Power of Bank to acquire undertakings.

A. Meaning and History of Banks:

Introduction

Indian Banking System for the last two centuries has seen many developments. An indigenous banking
system was being carried out by the businessmen called Sharoffs, Seths, Sahukars, Mahajans, Chettis,
etc. since ancient time. They performed the usual functions of lending moneys to traders and craftsmen
and sometimes placed funds at the disposal of kings for financing wars. The indigenous bankers could
not, however, develop to any considerable extent the system of obtaining deposits from the public, which
today is an important function of a bank.

Modern banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India which started in 1786, and the Bank of Hindustan. Thereafter, three presidency
banks namely the Bank of Bengal (this bank was originally started in the year 1806 as Bank of Calcutta
and then in the year 1809 became the Bank of Bengal) , the Bank of Bombay and the Bank of Madras,
were set up. For many years the Presidency banks acted as quasi-central banks. The three banks merged
in 1925 to form the Imperial Bank of India. Indian merchants in Calcutta established the Union Bank in
1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. Bank of Upper India was
established in 1863 but failed in 1913. The Allahabad Bank, established in 1865 , is the oldest survived
Joint Stock bank in India . Oudh Commercial Bank, established in 1881 in Faizabad, failed in 1958. The
next was the Punjab National Bank, established in Lahore in 1895, which is now one of the largest banks
in India. The Swadeshi movement inspired local businessmen and political figures to found banks of
and for the Indian community during 1906 to 1911. A number of banks established then have survived
to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and
Central Bank of India. A major landmark in Indian banking history took place in 1934 when a decision
was taken to establish ‘Reserve Bank of India’ which started functioning in 1935. Since then, RBI, as a
central bank of the country, has been regulating banking system.

STRUCTURE OF BANKS IN INDIA

Banks can be classified into scheduled and non- scheduled banks based on
certain factors

(a) Scheduled Banks:

Scheduled Banks in India are the banks which are listed in the Second Schedule
of the Reserve Bank of India Act1934. The scheduled banks enjoy several
privileges as compared to non- scheduled banks. Scheduled banks are entitled to
receive refinance facilities from the Reserve Bank of India. They are also entitled
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for currency chest facilities. They are entitled to become members of the Clearing
House. Besides commercial banks, cooperative

banks may also become scheduled banks if they fulfill the criteria stipulated by
RBI.
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Various Functions of Commercial Banks as per banking regulation act 1949

Functions of Commercial Banks: Primary and Secondary Functions (diagram)

A commercial bank is a kind of financial institution that carries all the operations
related to deposit and withdrawal of money for the general public, providing
loans for investment, and other such activities. These banks are profit-making
institutions and do business only to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing.
The bank receives the deposits and gives money to various projects to earn
interest (profit). The rate of interest that a bank offers to the depositors is known
as the borrowing rate, while the rate at which a bank lends money is known as
the lending rate.

Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

Accepts deposit : The bank takes deposits in the form of saving, current, and
fixed deposits. The surplus balances collected from the firm and individuals are
lent to the temporary requirements of the commercial transactions.
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Provides loan and advances : Another critical function of this bank is to offer
loans and advances to the entrepreneurs and business people, and collect
interest. For every bank, it is the primary source of making profits. In this
process, a bank retains a small number of deposits as a reserve and offers
(lends) the remaining amount to the borrowers in demand loans, overdraft, cash
credit, short-run loans, and more such banks.

Credit cash: When a customer is provided with credit or loan, they are not
provided with liquid cash. First, a bank account is opened for the customer and
then the money is transferred to the account. This process allows the bank to
create money.

(b) Secondary functions

Discounting bills of exchange: It is a written agreement acknowledging the

amount of money to be paid against the goods purchased at a given point of time
in the future. The amount can also be cleared before the quoted time through a
discounting method of a commercial bank.

Overdraft facility: It is an advance given to a customer by keeping the current

account to overdraw up to the given limit.

Purchasing and selling of the securities: The bank offers you with the
facility of selling and buying the securities.

Locker facilities: A bank provides locker facilities to the customers to keep their
valuables or documents safely. The banks charge a minimum of an annual fee for
this service.

Paying and gathering the credit : It uses different instruments like a

promissory note, cheques, and bill of exchange.
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b) Discuss the main functions of Banking Regulation Act ,1949, regarding Licensing of
Banking Companies and Power of Bank to acquire undertakings.
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3. Discuss the relationship between banker and customer. State the protection available
to the collecting banker under the Negotiable Instrument Act. Under what circumstances
the relation between the banker and customer is terminated.
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4. State the provisions relating to winding up of banking companies under Banking

Regulation Act. What kind of systematic measures should be adopted for preventing
winding up of Banking Companies.
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Q.5. Write notes on any three of the following-

a) Privileges of Holder in Due course.
b) Presentment for Acceptance and Payment.
c) Legal Perspectives of Automation.
d) Automatic Teller machine and use of internet.
e) Banker's Right to claim over securities and set off.

(a) Privileges of Holder in Due course.

Introduction

Prior to the enactment of the Negotiable Instruments Act, 1881 (hereinafter

referred to as the NI Act), the English Negotiable Instruments Act was applicable
in India in order to govern the functioning of the negotiable instruments. However,
the question which arises here is, what exactly is a negotiable instrument? Before
getting to know all the incidental concepts of a negotiable instrument, it is
important to understand the concept of the same. The term “negotiable
instruments” is not composed of just one meaning. Rather, it derives various
meanings depending upon its mode of implementation or the laws through which
it becomes applicable in a country. A negotiable instrument in general is considered
to be a paper or a document that ensures that a sum of money is paid upon the
demand of the payee or at times, immediately. It is pertinent to note that some of
such instruments also guarantee unconditional payment of money (for example,
in the case of a bill of exchange or a promissory note).

(Please see down pages)

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(B) Presentment for Acceptance and Payment.

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(c) Legal Perspectives of Automation (of Banks) (both answers combine)

(d) Automatic Teller machine and use of internet.
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(e) Banker's Right to claim over securities and set off.

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Q: 6 Briefly discuss the historical perspective indigenous banking sector in India and
elsewhere. State the different kinds of banks, multiple functions their growth and legal
issues.
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Q: 7 Discuss the legal implications of recovery of money lent to borrowers. State the
precautionary measures to be adopted by the banks prior to sanctioning of loans.
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Q: 8 Write Short note on:

a) Functions of Reserve Bank of India. (See Q. No. 01)
b) Presumptions as to Negotiable Instrument.
c) Smart Card and Debit Card
d) Control of RBI over Non-Banking Companies.
e) Legal aspects of Automation. (See Q. No. 5 C)

(Please see down next page)

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(B) Presumptions as to Negotiable Instrument.

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(C) Smart Card and Debit Card

Banks are the oldest, biggest and fastest growing financial sector in India. Banks meets the
needs of farmers, businessman, entrepreneurs, Government and other segments of the
society. Banks provide the contribution to the economic growth of a country by
mobilizing the financial resources for productive purposes. Banking is the process or
activity used by the banks for providing services to the customers. The banking industry
in India has a huge canvas of history. Bank accepts the deposits for the purpose of lending
or investment, withdrawal either by cheque, draft or otherwise. Now a day, Banks are using
electronic mode for providing better, efficient, frequent, transparent, speedy services to
customers. E-Banking or Internet banking is a form of electronic bank that provides financial
services for the individual client by the means of internet. E-Banking provides benefits to
consumers in terms of ease and cost of transaction through internet, telephone or
electronic delivery.

With the reforms in 1991, the Indian banking sector has witnessed an unprecedented growth.
The major factors contributing to growth are, increase in retail credit demand, proliferation
of ATMs and debit cards, decreasing NPAs due to Securitization, improved
macroeconomic conditions, diversification, interest r a t e s p r e a d s , a n d regulatory and
policy changes. Certain trends like growing competition, product innovation and branding,
focus on strengthening risk management systems, emphasis on technology have emerged
in the recent past. The Banking sector has been immensely benefited from the
implementation of superior technology during the recent past, almost in every nation in the
world. Productivity enhancement, innovative products, speedy

Some of the banks have introduced Smart Cards/ Debit cards and some more are desirous of introducing
such cards. Since Smart Cards/ Debit Cards are new payment instruments, it has been considered
necessary to issue broad guidelines to banks including safeguards to be observed in this regard. The
guidelines are given in the Annexure-I for compliance by banks.
Banks may introduce Smart / Debit Cards with the approval of their Boards, keeping in
view the Guidelines enclosed. While banks need not obtain the prior approval of the RBI, the
details of smart / debit cards introduced may be advised to us together with a copy each of the
agenda note put up to their Boards and the resolution passed thereon. It is advised that banks
should not issue smart/debit cards in tie-up with any other non-bank entities.

The banks should review operations of Smart / Debit Cards and put up review notes to
their Boards at half-yearly intervals, say, as at the end of March and September, every year.
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Electronic payment involving the use of card, in particular at point of sale and such other

places where a terminal/device for the use/access of the card is placed.

The withdrawing of bank notes, the depositing of the bank notes and cheques and connected operations
in electronic devices such as cash dispensing machines and ATMs.

Any card or a function of a card which contains real value in the form of electronic money which
someone has paid for in advance, some of which can be reloaded with further funds or one which can
connect to the cardholder's bank account (online) for payment through such account and which can be
used for a range of purposes.

Cash Withdrawals

No cash transaction, that is, cash withdrawals or deposits should be offered at the Point of Sale,
with the smart / debit cards under any facility, without prior authorisation of RBI under section
23 of the Banking Regulation Act, 1949.

3. Eligibility of Customers:

The banks should issue the smart/ debit card to its customers having good financial standing and who
have maintained the accounts satisfactorily for at least six months. However, the banks can issue on
line debit cards to select customers with good financial standing even if they have maintained the
accounts with the banks for less than six months. Banks can extend the Smart Card/ Debit Cards
facility to those having saving bank account/ current account / fixed deposit accounts with built-in
liquidity features maintained by individuals, corporate bodies and firms. Smart Card/ Debit Card
facility should not be extended to cash credit/ loan account holders. The banks can, however, issue on
line debit cards against personal loan accounts, where operations through cheques are permitted.

4. Treatment of Liability:

The outstanding balances / unspent balances stored on the smart / debit cards shall be subject to the
computation for the purpose of maintenance of reserve requirements. This position will be computed
on the basis of the balances appearing in the books of the bank as on the date of reporting.

5. Payment of interest:

In case of smart cards having stored value (as in case of the off-line mode of operation of the smart
card), no interest may be paid on the balances transferred to the smart cards. In case of debit cards or
on line smart cards, the payment of interest should be in accordance with the interest rate directives
issued to banks from time to time under Sections 21 and 35A of the Banking Regulation Act, 1949
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6. Terms and Conditions for issue:

The relationship between the bank and the card holder shall be contractual. In case of contractual
relationship between the cardholder and the bank:
1 . Each bank shall make available to the cardholders in writing, a set of contractual
terms and conditions governing the issue and use of such a card.
2. These terms shall maintain a fair balance between the interests of the parties concerned.
3. The terms shall be expressed clearly.
4. The terms shall specify the basis of any charges, but not necessarily the amount of
charges at any point of time.
5. The terms shall specify the period within which the cardholder's account would
normally be debited.
6. The terms may be altered by the bank, but sufficient notice of the change shall be
given to the cardholder to enable him to withdraw if he so chooses. A period shall be
specified after which time the cardholder would be deemed to have accepted the terms if
he had not withdrawn during the specified period.
7. The terms shall put the cardholder under an obligation to take all appropriate steps
to keep safe the card and the means (such as PIN or code) which enable it to be used.

8. The terms shall put the cardholder under an obligation not to record the PIN or code,
in any form that would be intelligible or otherwise accessible to any third party if access
is gained to such a record, either honestly or dishonestly.

9. The terms shall put the cardholder under an obligation to notify the bank
immediately after becoming aware:

of the loss or theft or copying of the card or the means which enable it to be used; of the recording on
the cardholder's account of any unauthorised transaction; of any error or other irregularity in the
maintaining of that account by the bank.

a. The terms shall specify a contact point to which such notification can be made. Such notification
can be made at any time of the day or night.
b. The terms shall put the cardholder under an obligation not to countermand an order which he
has given by means of his card.

• The terms shall specify that the bank shall exercise care when issuing PINs or codes and shall be
under an obligation not to disclose the cardholder's PIN or code, except to the cardholders.
• The terms shall specify that the bank shall be responsible for direct losses incurred by a cardholder
due to a system malfunction directly within the bank's control. However, the bank shall not be held
liable for any loss caused by a technical breakdown of the payment system if the breakdown of the
system was recognisable for the cardholder by a message on the display of the device or otherwise
known. The responsibility of the bank for the non-execution or defective execution of the
transaction is limited to the principal sum and the loss of interest subject to the provisions of the
law governing the terms.
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e) Control of RBI over Non-Banking Companies.

Introduction to the Reserve Bank of India Act, 1934

The Reserve Bank of India Act, 1934 is a landmark legislation that laid the
foundation for the establishment of the Reserve Bank of India (RBI), the central
bank of the country. The RBI was set up on 1st April 1935, with the primary
purpose of regulating the Indian currency and monetary system. The Act, which is
still in force today, governs the functioning, powers, and responsibilities of the RBI.

The creation of the RBI was a significant step in India’s financial history, as it
provided a centralized authority for managing the country’s monetary policy,
controlling inflation, stabilizing the currency, and regulating the banking sector.
Before the RBI, the monetary and banking system in India was fragmented, with
multiple currency issuers and no single regulatory body. The RBI Act aimed to
bring stability to the financial system by consolidating control under one central
authority.

The scope of the RBI Act is broad, covering various aspects such as the
management of currency, monetary policy, banking supervision, foreign exchange
regulation, and the development of the financial sector. Over time, the RBI’s role
has expanded to include responsibilities such as managing public debt, ensuring
financial inclusion, and promoting economic growth.

In essence, the Reserve Bank of India Act, 1934 is the legal framework that defines
the powers and functions of the RBI, making it central to India's economic and
financial system. It serves as the backbone of the country’s banking regulations,
ensuring the stability and growth of the Indian economy.

Functions of RBI –
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a). Banking Functions

b). Issue bank notes

c). Monetary Policy Functions

d). Public Debt Functions

e). Foreign Exchange Management

f). Banking Regulation & Supervision

g). Regulation and Supervision of NBFCs Regulation & Supervision of Co-

operative banks
h). Regulation of Money Market Instruments

i). Payment and Settlement Functions

j). Consumer Protection Functions

k). Financial Inclusion and Development Functions

PROVISION RELATING TO NON-BANKING INSTITUTIONS RECEIVING DEPOSITS AND

FINANCIAL INSTITUTIONS,

Non-Banking Financial Institutions (NBFIs) are financ al institut ons that provide financial services, but
do not have a full banking license and cannot offer typical banking services such as accepting demand
deposits (checking/savings accounts) or providing central bank services. NBFIs play a crucial role in the
financial system by offering a variety of financial products, but they operate under different regulatory
frameworks compared to commercial banks.

Key Characteristics of Non-Banking Financial Institutions (NBFIs):

a). Financial Services:

• NBFIs provide services like asset management, leasing, venture capital, insurance, and
mortgage lending.
• They include entities like NBFCs (Non-Banking Financial Companies), microfinance
institutions, and insurance companies.
b). Regulation:
• In India, NBFIs are regulated by the Reserve Bank of India (RBI) under the RBI Act,
1934, as well as other laws depending on the specific type of institution.
• They are also governed by the Securities and Exchange Board of India (SEBI)

for activities related to securities.

c). Deposit-taking Restrictions:

• Unlike banks, most NBFIs cannot accept demand deposits. This means they cannot offer
checking or savings accounts to the public.
• Some NBFIs, such as housing finance companies and loan companies, can accept fixed
deposits but under strict conditions set by the RBI.
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d). Capital and Liquidity Requirements:

NBFIs must maintain capital adequacy and liquidity standards, although these might differ from those
required for commercial banks.

• Types of NBFIs:
• Asset Finance Companies (AFCs): These institutions finance assets such as vehicles,
machinery, and equipment.
• Loan Companies (LCs): They provide loans and advances to individuals and
businesses.
• Investment Companies (ICs): They engage in the acquisition of shares and securities
and the management of investment portfolios.
• Microfinance Institutions (MFIs): These focus on providing microloans to low-
income individuals or communities that have limited access to banking services.

Regulatory Framework for NBFIs in India:

1. RBI Act, 1934:
This act defines the roles and powers of the RBI and gives it the authority to regulate the
activities of NBFIs that fall within its jurisdiction, particularly those involved in financial
services, credit, and loan disbursement.

a). Non-Banking Financial Companies (NBFCs):

• An NBFC is a company that engages in financial activities such as loans, credit, and investment
management. However, it does not have a full banking license.
• The RBI governs the registration, supervision, and operational activities of NBFCs under the
RBI Act. NBFCs are subject to specific capital adequacy and deposit-taking regulations.

b). Securities and Exchange Board of India (SEBI):

SEBI regulates stockbrokers, mutual funds, and other entities that deal with securities. It ensures
transparency, fairness, and accountability in the financial market.

Regulatory Framework
The need for a regulatory framework for the financial system is globally recognized. This is crucial to
protect the interests of a large number of savers and depositors, as well as to ensure the effective
functioning of institutions within the financial system. In India, the Reserve Bank of India (RBI) serves
as the central bank and the primary regulatory authority in the money market. The RBI derives its
powers from two major legislative acts: the Reserve Bank of India Act, 1934 and the Banking
Regulation Act, 1949.
The Reserve Bank of India Act, 1934 not only outlines the constitution, management, and functions
of the RBI but also grants it authority to regulate and control commercial banks, non-banking financial
companies (NBFCs), and other financial institutions. The Banking Regulation Act, 1949 primarily
governs the functioning of commercial banks in India, many provisions of which also apply to
cooperative banks. The State Bank of India, its subsidiary banks, and the nationalized banks are also
regulated under the framework specific to their incorporation.
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Furthermore, there are two key regulatory authorities in India: the Reserve Bank of India (RBI), which
oversees the money market, and the Securities and Exchange Board of India (SEBI), which regulates
the capital market. Both authorities operate under various legislative enactments and are granted
discretion to ensure the smooth functioning of their respective markets.
Objectives
This section aims to examine the regulations imposed by the central bank on NBFCs (Non-Banking
Financial Companies), focusing on their role in the financial market. The discussion covers the
regulatory mechanisms for NBFCs, their acceptance of public deposits, and the prudential norms that
govern their operations. Additionally, it highlights the importance of safeguarding depositors' interests
in this context.

Regulations Over Non-Banking Financial Companies (NBFCs)

Non-Banking Financial Companies (NBFCs) play an essential role in financial intermediation in India.
They provide financial services to individuals and businesses that are not typically served by
traditional banking institutions. This includes sectors such as hire purchase finance, leasing companies,
loans, and investment companies, among others.

Given their significant role, NBFCs are subject to a comprehensive regulatory framework. The
Reserve Bank of India Act, 1934, specifically Chapter III-B, provides the regulatory foundation for
NBFCs. Key provisions of this chapter include:

d). Regulation or prohibition of public prospectus: The RBI has the authority to regulate or prohibit
the issuance of prospectuses or advertisements by NBFCs seeking to raise deposits from the public.
The RBI may also direct the inclusion of specific information in such advertisements.
e). Collection of deposit-related information: The RBI can direct NBFCs to provide information
related to deposits. If an NBFC fails to comply, the RBI has the authority to prohibit the acceptance
of further deposits.
f). Inspection: The RBI can inspect NBFCs at any time to verify the correctness of the information
submitted and ensure compliance with regulations.

In addition, the RBI (Amendment) Act, 1997 conferred greater powers upon the RBI, including:

• Ensuring NBFCs are registered with the RBI and maintain a minimum Net Owned Funds (NOF)
of Rs. 25 lakh, which can be increased to Rs. 2 crore for companies incorporated after April 20,
1999.
• Mandating that NBFCs set aside 20% of their annual net profits into a Reserve Fund before
declaring any dividends.
• Directing NBFCs to maintain a minimum level of liquid assets in the form of approved
securities.
• Empowering the Company Law Board to direct NBFCs to repay matured deposits if e unable or
unwilling to do so.

NBFCs Acceptance of Public Deposits (Reserve Bank)

The RBI's directives on the acceptance of public deposits by NBFCs, initially issued in 1998 and
revised later, outline important regulations for NBFCs, especially those accepting public deposits.
The regulations categorize NBFCs into three groups:
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a). NBFCs accepting public deposits.

b). NBFCs not accepting public deposits but involved in financial business.
c). Core investment companies (which invest at least 90% of their assets in securities of their
group companies).
The RBI’s focus is on regulating those NBFCs that accept public deposits. Key
regulatory aspects include:
• Definition of public deposits: Public deposits include fixed deposits, recurring deposits,
deposits from shareholders of a public company, and unsecured debentures raised from the public. It
excludes borrowings from banks and financial institutions, deposits from directors, inter-corporate
deposits, etc.
a). Ceilings on public deposits: NBFCs with a minimum NOF of Rs. 25 lakh or more are
subject to deposit ceilings. This limit varies based on the company’s credit rating and
financial factors.
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Q.9 Write notes on any three of the following:

a) Features of Promissory Notes and Bill of Exchange
b) Banker's Right to claim over securities and set off. (Q: No. 05 E)
c) Powers and Functions of Reserve Bank of India.
d) Powers and Functions of Debt Recovery Tribunal.
e) Reconstruction and Reorganization of Banking Companies

(Please see answers from Next Page)

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a) Features of Promissory Notes and Bill of Exchange

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(c) Powers and Functions of Reserve Bank of India.

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D) Powers and Functions of Debt Recovery Tribunal.

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(E) Reconstruction and Reorganization of Banking Companies

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Q: 10 (a) Explain the meaning of the term bank. State the main functions of the bank
regarding lending of money and accepting deposits from the public. (Repeated Q No. 2A)
(b) Holder and Holder in due Course. (Repeated 5A)
(c) Functions of Debt Recovery Tribunal. (Repeated Q No. 09D)
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Q: 11 Short note on Good lending principles and lending to poor mass.

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Q: 12 Short note on Multi - functional banks, growth and legal issues. (Repeated Q No. 06)

Q: 13 i) Define Negotiation.
ii) Write a note on kinds of instruments. Lay down the rules regarding presentment
and payment. (Repeated Q No. 5b and 9A)
iii) Discuss the relationship between banker and customer. (Repeated Q No. 03)
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i) Define Negotiation.
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Q:14 Short note on Banker’s Lien. (Repeated Q. No. 05 E)

Q: 15 Short note on Good Leading Practices. (Repeated Q. No. 11)
Q:16 Short note on Debt Recovery Tribunal (Repeated Q. No. 09 D)
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Q:17 Discuss the Organizational Structure of Reserve Bank of India. Its Role and
Functions. (Role and Functions Repeated Question No. 09 (C)
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(Powers and Functions Please see Q No. 9 (C)

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Q: 18 Explain the Impact of Nationalization and Privatization of Bank.

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Q: 19 Explain in detail the principles of Sound Leading Policies followed by the banks?
(Repeated Q. No. 11)
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Q: 20 State the salient features of Negotiable Instruments Act, 1881 and Analyse the
recent amendments carried out in the Negotiable Instrument Act?
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Q: 21 Analyse the emerging trend of Information Technology used in Banking Sector?

(Repeated Q. No. 05 (C, D))
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Q: 22 Short note on Internet and Phone Banking.

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Q: 23 Short note on Duties of Banker towards Bank’s Customer. (Repeated Q: No. 03)

Q: 24 State the objective behind growth of multifunctional banks and issued faced by
them. (Repeated Q. No. 06)
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Q: 25 Define the term cheque. Explain its types. Discuss in detail its characteristics and
types of crossing.
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Q: 26 Short note on Suspension and Winding of Banking Company (Repeated Q. No. 04)
Q:27 Short note on Essentials of a valid promissory note. (Repeated Q. N0. 9A)
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Q: 28 Short note on Inchoate Instruments.

(Note for Introduction and types of Instrument please read question no. 20 and about
Inchoate Instrument notes are attached here with). (please write diagram)

Where one person signs and delivers to another a paper stamped in accordance with the
law relating to negotiable instruments then in force in 1[India], and either wholly blank
or having written thereon an incomplete negotiable instrument, he thereby gives prima
facie authority to the holder thereof to make or complete, as then case may be, upon it a
negotiable instrument, instrument, for any amount specified therein and not exceeding
the amount covered by the stamp. The person so signing shall be liable upon such
instrument, in the capacity in which he signed the same, to any holder in due course for
such amount, provided that no person other than a holder in due course shall recover
from the person delivering the instrument anything in excess of the amount intended by
him to be paid thereunder.
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Q: 29 Short note on Bank rate policy. ( We are going to write complete Monetary Policy
as any questions related to Monetary Policy will come, will consider it.
Monetary policy refers to the set of actions and measures implemented by a country's central bank
to regulate and control the money supply, credit availability, and interest rates in the economy. The
primary goal of monetary policy is to achieve specific macroeconomic objectives, such as maintaining
price stability, promoting economic growth, and ensuring financial stability. Interest rate changes
and adjustments to bank reserve requirements are examples of monetary policy strategies.

What exactly is Monetary Policy?

• Monetary policy is a macroeconomic plan established by the central bank.

• It is a demand-side economic strategy used by a nation's government to achieve

macroeconomic goals including inflation, consumption, growth, and liquidity.

• Monetary policy includes changing interest rates, either directly or indirectly, through open
market operations, reserve requirements, or foreign exchange trading.

• Credit policy is a subset of monetary policy since it governs how much and at what interest
rate banks extend credit.

• Central banks use various tools and strategies to influence the money supply and interest
rates, which in turn impact economic activities and overall economic conditions.

Types of Monetary Policy

There are two types of monetary policy:

1) Expansionary Policy

• An expansionary policy boosts economic activity during slowdowns or recessions.

• Expansionary policy works by increasing the total money supply in the economy.
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• The money supply in the economy is increased by lowering the general interest rates on loans
and other forms of debt.

• When there are low interest rates, people tend to save less, and consumer spending and
borrowing increase. Thus, it is used to stimulate economic growth.

2) Contractionary Policy

• Contractionary policy decreases the total supply of money in the economy by increasing the
interest rates.

• It is used to reduce prices caused by an excess money supply.

Objectives of Monetary Policy

• Monetary policy is concerned with making money available to the market at reasonable rates
and in sufficient quantities at the appropriate time in order to achieve:

o Price stability

o Accelerating the growth of economy

o Exchange rate stabilization

o Balancing savings and investment

o Generating employment

o Financial stability

• The primary goal of monetary policy is to maintain price stability while keeping growth in mind.
Price stability is a prerequisite for long-term growth.

• In order to maintain price stability, inflation must be kept under control.

• Every five years, the Indian government sets an inflation target. The Reserve Bank of India (RBI)
plays an important role in the consultation process for inflation targeting.

• The current inflation-targeting framework in India is flexible.

Monetary Policy in India

Monetary Policy in India

• In India, the monetary policy of the Reserve Bank of India aims to control the amount of money
in circulation in order to meet the requirements of various economic sectors and quicken the
rate of economic expansion.

• Historically, in India, monetary policy was announced twice a year, once during the slack
season (April-September) and once during the busy season (October-March), in accordance
with agricultural cycles.

• However, because monetary policy has become more dynamic, the Reserve Bank of India
decided to issue a bi-monthly Monetary Policy.

• Statements—once every two months—beginning in 2014, as recommended by the Urjit Patel

Committee.
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RBI get its Mandate to conduct Monetary Policy

How does the RBI get its Mandate to conduct Monetary Policy?

• The Reserve Bank of India (RBI) controls the monetary policy and this mandate is clearly
mentioned in the Reserve Bank of India Act, 1934.

• The Monetary Policy Department of the RBI assists the Monetary Policy Committee (MPC) in
formulating the monetary policy of the nation.

• For this, the RBI uses a variety of tools to carry out monetary policy, including open market
operations, bank rate policy, reserve system, credit control policy, and moral persuasion.

• There have recently been many changes in the way India's monetary policy is formed, with the
introduction of the Monetary Policy Framework (MPF), Monetary Policy Committee (MPC),
and Monetary Policy Process (MPP).

Instruments of Monetary Policy

Instruments of Monetary Policy

Monetary policy is implemented using a variety of direct and indirect instruments:

1. Repo Rate

• Repo Rate is the (fixed) interest rate at which the Reserve Bank provides overnight liquidity to
banks in exchange for the government and other approved securities as collateral under the
liquidity adjustment facility (LAF).

2. Reverse Repo Rate

• Reverse Repo Rate is the (fixed) interest rate at which the Reserve Bank absorbs liquidity from
banks on an overnight basis in exchange for eligible government securities under the LAF.

3. Liquidity Adjustment Facility (LAF)

• Liquidity Adjustment Facility (LAF) is made up of both overnight and term repo auctions.

• The Reserve Bank has gradually increased the proportion of liquidity injected through fine-
tuning variable rate repo auctions of various tenors.

• The goal of term repo is to help develop the inter-bank term money market, which in turn can
set market-based benchmarks for loan and deposit pricing and thus improve monetary policy
transmission.

• The Reserve Bank also conducts variable interest rate reverse repo auctions as market
conditions dictate.

4. Marginal Standing Facility (MSF)

• Marginal Standing Facility (MSF) is the facility through which scheduled commercial banks can
borrow an additional amount of overnight money from the Reserve Bank by dipping into
their Statutory Liquidity Ratio (SLR) portfolio up to a certain limit at a penal rate of interest.

• This acts as a safety valve for the banking system in the event of unexpected liquidity shocks.

5. Corridor
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• The corridor for the daily movement in the weighted average call money rate is determined
by the MSF rate and the reverse repo rate.

6. Bank Rate

• Bank Rate is the rate at which the Reserve Bank is willing to purchase or rediscount bills of
exchange or other commercial papers.

• Section 49 of the Reserve Bank of India Act, 1934 mandates the publication of the Bank Rate.

• This rate has been aligned with the MSF rate and, as a result, changes automatically when the
MSF rate and the policy repo rate change.

7. Cash Reserve Ratio (CRR)

• Cash Reserve Ratio (CRR) is the average daily balance that a bank is required to maintain with
the Reserve Bank as a share of such percentage of its Net Demand and Time Liabilities
(NDTL) as specified by the Reserve Bank in the Gazette of India from time to time.

8. Statutory Liquidity Ratio (SLR)

• Statutory Liquidity Ratio (SLR) is the percentage of NDTL that a bank must keep in safe and
liquid assets such as unencumbered government securities, cash, and gold.

• SLR changes frequently have an impact on the availability of resources in the banking system
for lending to the private sector.

9. Open Market Operations (OMOs)

• Open Market Operations (OMOs) include the outright purchase and sale of government
securities for the purpose of injecting and absorbing long-term liquidity, respectively.

10. Market Stabilisation Scheme (MSS)

• Market Stabilisation Scheme (MSS) is a monetary management tool that was introduced in
2004.

• Short-term government securities and treasury bills are sold to absorb longer-term surplus
liquidity resulting from large capital inflows.

• The money raised in this manner is kept in a separate government account of the Reserve
Bank.

Monetary Policy Framework (MPF)

Monetary Policy Framework (MPF)

• While the Government of India establishes the Flexible Inflation Targeting Framework in
India, the Reserve Bank of India (RBI) is in charge of the country's Monetary Policy Framework.

• The amended RBI Act explicitly gives the Reserve Bank the legislative mandate to run the
country's monetary policy framework.

• The framework aims to set the policy (repo) rate based on an assessment of the current and
evolving macroeconomic situation, as well as to modulate liquidity conditions in order to
anchor money market rates at or near the repo rate.
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• Changes in repo rates are transmitted through the money market to the entire financial
system, influencing aggregate demand – a key determinant of inflation and growth.

• Once the repo rate is announced, the Reserve Bank's operating framework envisions day-to-
day liquidity management through appropriate actions aimed at anchoring the operating
target - the weighted average call rate (WACR) – around the repo rate.

Monetary Policy Committee (MPC)

Monetary Policy Committee (MPC)

• The Monetary Policy Committee (MPC) is the committee set up by the Union government to
set the policy interest rates as a part of its monetary policy.

• It is headed by the Governor of the Reserve Bank of India (RBI).

• The Monetary Policy Committee's decisions will impact the money supply and liquidity in the
economy.

• The MPC is a six-person committee appointed by the Central Government (Section 45ZB of
the amended RBI Act, 1934).

• The MPC must meet at least four times per year. The MPC meeting requires a quorum of four
members. Each MPC member has one vote, and in the event of a tie, the Governor has
a second or casting vote.

• Following the conclusion of each MPC meeting, the resolution adopted by the MPC is
published.

Conclusion

Monetary policy decisions are typically made by a central bank's monetary policy committee or board
of governors. The effectiveness of monetary policy depends on a variety of factors, including the
economic conditions, government fiscal policies, global economic trends, and financial market
dynamics. Central banks often use a combination of these tools to achieve their policy objectives and
maintain a stable and healthy economy.