Kongunadu Arts and Science College(Autonomous)

KONGUNADU ARTS AND SCIENCE COLLEGE(AUTONOMOUS)

DEPARTMENT OF B.COM BANKING & INSURANCE

READING MATERIAL ODD SEMESTER 2019

SUBJECT: INDIAN BANKING SYSTEM

UNIT: I II & III (SEMESTER I)

STAFF IN CHARGE: Dr.R.MAHARAJOTHI PRIYA

ASSOCIATE PROFESSOR & HEAD

UNIT - I

Banking System in India

In India the banks and banking have been divided in different groups. Each group has their own benefits and limitations in their operations. They have their own dedicated target market. Some are concentrated their work in rural sector while others in both rural as well as urban. Most of them are only catering in cities and major towns.

The banking system plays an important role in promoting economic growth not only by channeling savings into investments but also by improving allocative efficiency of resources. The recent empirical evidence, in fact, suggests that banking system contributes to economic growth more by improving the allocative efficiency of resources than by channeling of resources from savers to investors. An efficient banking system is now regarded as a necessary pre- condition for growth.

The banking system of India consists of the central bank (Reserve Bank of India - RBI), commercial banks, cooperative banks and development banks (development finance institutions). These institutions, which provide a meeting ground for the savers and the investors, form the core of India’s financial sector. Through mobilization of resources and their better allocation, banks play an important role in the development process of underdeveloped countries.

Banking Development and Nationalization of Banks in India

Banking development in India has been, by and large, a state-induced activity. The Reserve Bank of India was nationalized in 1949 followed by the nationalization of Imperial Bank of India (now the State Bank of India - SBI) in 1955. In 1969, 14 major commercial banks were nationalized and the exercise was repeated when 6 more commercial banks were nationalized in 1980. Thus, prior to economic reforms initiated in early 1990s, banking business in India was a near-monopoly of the Government of India.

The underlying philosophy of this approach was to encourage growth, via availability of adequate credit at reasonable/concessional rates of interest, in areas where commercial considerations did not allow for disbursal of credit.

The Financial Sector in India

Along with the rest of the economy and perhaps even more than the rest, financial markets in India have witnessed a fundamental transformation in the years since liberalization. The going has not been smooth all along but the overall effects have been largely positive.

Nationalization of commercial banks was a mixed blessing. After nationalization there was a shift of emphasis from industry to agriculture. The country witnessed rapid expansion in bank branches, even in rural areas. However, bank nationalization created its own problems like

2 excessive bureaucratization, red-tapism and disruptive tactics of trade unions of bank employees. It was in this backdrop that wide-ranging banking sector reforms were introduced as an integral part of the economic reforms programme started in early 1990s and which is still under way.

The Indian banking sector has witnessed wide ranging changes under the influence of the financial sector reforms initiated during the early 1990s. The approach to such reforms in India has been one of gradual and non-disruptive progress through a consultative process. The emphasis has been on deregulation and opening up the banking sector to market forces. The Reserve Bank has been consistently working towards the establishment of an enabling regulatory framework with prompt and effective supervision as well as the development of technological and institutional infrastructure.

Persistent efforts have been made towards adoption of international benchmarks as appropriate to Indian conditions. While certain changes in the legal infrastructure are yet to be effected, the developments so far have brought the Indian financial system closer to global standards.

Private Banks are today increasingly displacing nationalized banks from their positions of pre- eminence. Though the nationalized State Bank of India (SBI) remains the largest bank in the country by far, private banks like ICICI Bank, Axis Bank and HDFC Bank have emerged as important players in the retail banking sector. Though spawned by government-backed financial institutions in each case, they are profit-driven professional enterprises.

Financial Sector in India consists of three main segments:

1. Financial institutions -banks, mutual funds, insurance companies 2. Financial markets -money market, debt market, capital market, forex market 3. Financial products -loans, deposits, bonds, equities

Financial Regulators in India

There are mainly three Financial regulators in India:

1. Reserve Bank of India (RBI) - Banking Sector 2. Securities Exchange Board of India (SEBI) - Capital Markets /Mutual Funds 3. Insurance Regulatory and Development Authority (IRDA) - Insurance Companies

Structure of Banking System In India

Banks can generally be classified into various sub-categories as follows:

• Public Sector Banks In India o The State Bank Group and Nationalized banks: Is a group of 27 banks o Has the largest number of branches in metro/ urban/rural areas throughout the country o Contributes to about 75% of the total deposits o Contributes about 70% of total advances of all commercial banks in India.

o Most have a very large branch network spread over all parts of the country o Have a Large deposits and assets base o Perform all kinds of core and modern banking functions

• Scheduled Banks: o These are banks which are listed in the second schedule of the Reserve Bank of India Act, 1934 o These banks are required to maintain certain amounts with RBI and, in return, they enjoy the facility of financial accommodation and remittance facilities at concessionary rates from RBI o State Co-operative Banks o Commercial Banks

RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) is India's central banking institution, which controls the issuance and supply of the Indian rupee. Until the Monetary Policy Committee was established in 2016,[6] it also controlled monetary policy in India.[7] It commenced its operations on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934.[8] The original share capital was divided into shares of 100 each fully paid, which were initially owned entirely by private shareholders.[9] Following India's independence on 15 August 1947, the RBI was nationalised on 1 January 1949.[10]

The RBI plays an important part in the Development Strategy of the Government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 21-member central board of directors: the governor; four deputy governors; two finance ministry representatives (usually the Economic Affairs Secretary and the Financial Services Secretary); ten government-nominated directors to represent important elements of India's economy; and four directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and the capital New Delhi. Each of these local boards consists of five members who represent regional interests, the interests of co-operative and indigenous banks.

The central bank was an independent apex monetary authority which regulates banks and provides important financial services like storing of foreign exchange reserves, control of inflation, monetary policy report till August 2016. A central bank is known by different names in different countries. The functions of a central bank may vary from country to country and are autonomous or body and perform or through another agency vital monetary functions in the country. A central bank is a vital financial apex institution of an economy and the key objects of central banks may differ from country to country still they perform activities and functions with the goal of maintaining economic stability and growth of an economy.[11]

The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for Financial Inclusion (AFI). The bank is often referred to by the name ''Mint Street''.[12] RBI is also known as banker's bank.

Structure

RBI runs a monetary museum in Mumbai

The central board of directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The board consists of a governor, and not more than four deputy governors; four directors to represent the regional boards;[36] two — usually the Economic Affairs Secretary and the Financial Services Secretary — from the Ministry of Finance and ten other directors from various fields. The Reserve Bank — under Raghuram Rajan's governorship — wanted to create a post of a chief operating officer (COO), in the rank of deputy governor and wanted to re-allocate work between the five of them (four deputy governor and COO).[37][38]

The bank is headed by the governor, currently Shaktikanta Das.[1] There are four deputy governors BP Kanungo,[39]N. S. Vishwanathan, Viral Acharya and Mahesh Kumar Jain.[40]

Two of the four deputy governors are traditionally from RBI ranks and are selected from the bank's executive directors. One is nominated from among the chairpersons of public sector banks and the other is an economist. An Indian Administrative Service officer can also be appointed as deputy governor of RBI and later as the governor of RBI as with the case of Y. Venugopal Reddy and Duvvuri Subbarao. Other persons forming part of the central board of directors of the RBI are Dr. NachiketMor, Y. C. Deveshwar, Prof Damodar Acharya, Ajay Tyagi and Anjuly Duggal.

Uma Shankar, chief general manager (CGM) in charge of the Reserve Bank of India's financial inclusion and development department has taken over as executive director (ED) in the central bank.[citation needed]

Sudha Balakrishnan, a former vice president at National Securities Depository Limited, assumed charge as the first chief financial officer (CFO) of the Reserve Bank on 15 May 2018; she was given the rank of an executive director.[4

Functions

Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting "Prosperity through agriculture".[46]

The regional office of RBI (right) in front of GPO (left) at Dalhousie Square, Kolkata.

The central bank of any country executes many functions such as overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank for government and as a banker of scheduled commercial banks. It also works for overall economic growth of the country. The preamble of the Reserve Bank of India describes its main functions as:

..to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

Financial supervision

The primary objective of RBI is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions, and non-banking finance companies.

The board is constituted by co-opting four directors from the Central Board as members for a term of two years and is chaired by the governor. The deputy governors of the reserve bank are ex-officio members. One deputy governor, usually, the deputy governor in charge of banking regulation and supervision, is nominated as the vice-chairman of the board. The board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes deputy governor as the chairman and two directors of the Central Board as members. The BFS oversees the functioning of the Department of Banking Supervision (DBS), the Department of Non-Banking Supervision (DNBS) and the Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues.

Regulator and supervisor of the financial system

The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Its objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of

6 complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins.[47]

Regulator and supervisor of the payment and settlement systems

Payment and settlement systems play an important role in improving overall economic efficiency. The Payment and Settlement Systems Act of 2007 (PSS Act)[48] gives the Reserve Bank oversight authority, including regulation and supervision, for the payment and settlement systems in the country. In this role, the RBI focuses on the development and functioning of safe, secure and efficient payment and settlement mechanisms. Two payment systems National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) allow individuals, companies and firms to transfer funds from one bank to another. These facilities can only be used for transferring money within the country.

NEFT operates on a deferred net settlement (DNS) basis and settles transactions in batches. The settlement takes place for all transactions received until a particular cut-off time. It operates in hourly batches — there are twelve settlements from 8 am to 7 pm on weekdays and six between 8 am and 1 pm on Saturdays.[49] Any transaction initiated after the designated time would have to wait until the next settlement time. In RTGS, transactions are processed continuously, all through the business hours. RBI's settlement time is 9 am to 4:30 pm on weekdays and 9 am to 2 pm on Saturdays.[50]

Banker and debt manager to government

Just as individuals need a bank to carry out their financial transactions effectively and efficiently, governments also need a bank to carry out their financial transactions. The RBI serves this purpose for the Government of India (GoI). As a banker to the GoI, the RBI maintains its accounts, receive payments into and make payments out of these accounts. The RBI also helps the GoI to raise money from the public via issuing bonds and government-approved securities.

Managing foreign exchange

The central bank manages to reach different goals of the Foreign Exchange Management Act, 1999. Their objective is to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

With increasing integration of the Indian economy with the global economy arising from greater trade and capital flows, the foreign exchange market has evolved as a key segment of the Indian financial market and the RBI has an important role to play in regulating and managing this segment. The RBI manages forex and gold reserves of the nation.

On a given day, the foreign exchange rate reflects the demand for and supply of foreign exchange arising from trade and capital transactions. The RBI's Financial Markets Department (FMD) participates in the foreign exchange market by undertaking sales/purchases of foreign currency to ease volatility in periods of excess demand for/supply of foreign currency.

Issue of currency

Other than the Government of India, the Reserve Bank of India is the sole body authorized to issue banknotes in India.

The bank also destroys banknotes when they are not fit for circulation. All the money issued by the central bank is its monetary liability, i.e., the central bank is obliged to back the currency with assets of equal value, to enhance public confidence in paper currency. The objectives are to issue bank notes and give the public an adequate supply of the same, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves.

The RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development because both objectives are diverse in themselves.

For the printing of notes, RBI uses four facilities:[51]

• The Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned company of the Government of India, has printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh. • The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by the RBI, has printing facilities in Mysore, Karnataka and Salboni, West Bengal.

For the minting of coins, SPMCIL has four mints at Mumbai, Noida, Kolkata and Hyderabad for coin production.[51]

Whilst coins are minted by, and ₹1 notes are issued by the Government of India (GoI), the RBI works as an agent of GoI for the distribution and handling of coins. RBI also works to prevent counterfeiting of currency by regularly upgrading security features of currency.

The RBI is authorized to issue notes with face values of up to ₹10,000 and coins up to ₹1,000 rupees.

New ₹500 and ₹2,000 notes were been issued on 8 November 2016. The old series of ₹1,000 and ₹500 notes were demonetized from midnight on 8 November 2016.

Earlier ₹1,000 notes have been discarded by the RBI.

Banker's bank

Nagpur branch holds most of India's gold deposits.

Reserve Bank of India also works as a central bank where commercial banks are account holders and can deposit money. RBI maintains banking accounts of all scheduled banks. Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate and

8 open market operations. As banker's bank, the RBI facilitates the clearing of cheques between the commercial banks and helps the inter-bank transfer of funds. It can grant financial accommodation to schedule banks. It acts as the lender of the last resort by providing emergency advances to the banks. It supervises the functioning of the commercial banks and takes action against it if the need arises. The RBI also advises the banks on various matters, for example, Corporate Social Responsibility.

Regulator of the Banking System

RBI has the responsibility of regulating the nation's financial system. As a regulator and supervisor of the Indian banking system it ensures financial stability & public confidence in the banking system. RBI uses methods like On-site inspections, off-site surveillance, scrutiny & periodic meetings to supervise new bank licenses, setting capital requirements and regulating interest rates in specific areas. RBI is currently focused on implementing norms.

Detection of fake currency

In order to curb the counterfeit money problem in India, RBI has launched a website to raise awareness among masses about fake banknotes in the market. www.paisaboltahai.rbi.org.in provides information about identifying fake currency.[57]

On 22 January 2014; RBI gave a press release stating that after 31 March 2014, it will completely withdraw from circulation of all banknotes issued prior to 2005. From 1 April 2014, the public will be required to approach banks for exchanging these notes. Banks will provide exchange facility for these notes until further communication. The reserve bank has also clarified that the notes issued before 2005 will continue to be legal tender. This would mean that banks are required to exchange the notes for their customers as well as for non-customers. From 1 July 2014, however, to exchange more than 15 pieces of `500 and `1000 notes, non-customers will have to furnish proof of identity and residence as well as show aadhar to the bank branch in which he/she wants to exchange the notes.

This move from the reserve bank is expected to unearth black money held in cash. As the new currency notes have added increased security features, they would help in curbing the menace of fake currency.[58]

Developmental role

The central bank has to perform a wide range of promotional functions to support national objectives and industries.[19] The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of these problems are results of the dominant part of the public sector.[59]

Key tools in this effort include Priority Sector Lending such as agriculture, micro and small enterprises (MSE), housing and education. RBI work towards strengthening and supporting small local banks and encourage banks to open branches in rural areas to include large section of society in banking net.

Related functions

The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition.[60] The institution maintains banking accounts of all scheduled banks, too. RBI on 7 August 2012 said that Indian banking system is resilient enough to face the stress caused by the drought-like situation because of poor monsoon this year.[61]

Custodian to foreign exchange The Reserve Bank has custody of the country's reserves of international currency, and this enables the Reserve Bank to deal with crisis connected with adverse balance of payments position.

UNIT - II STATE BANK OF INDIA

State Bank of India: Establishment, Objectives, Functions and Achievements

Establishment of State Bank of India:

The State Bank of India is the biggest commercial bank and holds a special position in the modern commercial banking system in India. It came into existence on July 1, 1955 after the nationalisation of Imperial Bank of India. The Imperial Bank of India was established in 1921 by amalgamating the three Presidency Banks of Madras, Bombay and Bengal.

Until the establishment of the Reserve Bank of India in 1935, the Imperial Bank of India, in addition to its normal commercial banking functions had been performing certain central banking functions. It used to act as the banker to the government, as banker’s bank and as the clearing house.

After the establishment of the Reserve Bank of India, the Imperial Bank of India left its central banking functions, but continued to serve as the agent of the Reserve Bank in the areas where the latter did not have its branches. In 1955, on the recommendations of the Rural Credit Survey Committee, the Imperial Bank of India was nationalised and renamed as the State Bank of India through the State Bank of India Act 1955.

Organisation of State Bank of India: i. Capital:

The state Bank of India has an authorised capital of Rs. 20 crore which has been divided into 20 lakh shares of Rs. 100 each. The issued capital of the State Bank is Rs. 5.6 crore. The shares of the State Bank are held by the Reserve Bank, insurance companies and the general public. At the end of March 2001, the paid-up capital and the reserves of the State Bank were Rs. 13461 crore. ii. Management:

The management of the State Bank of India is under the control of a Central Board of Directors consisting of 20 members.

The break-up of the Central Board is as given below:

(a) A Chairman and a Vice-Chairman are to be appointed by the Central Government in consultation with Reserve Bank.

(b) Two Managing Directors are to be appointed by the Central Board with the approval of the Central Government,

(d) Eight directors are to be nominated by the Central Government in consultation with the Reserve Bank to represent territorial and economic interests. Not less than two of them should have special knowledge in the working of cooperative institutions and of the rural economy,

(e) One director is to be nominated by the Central Government,

(f) One director is to be nominated by the Reserve Bank. iii. Subsidiary Banks:

Through the State Bank of India (Subsidiary Banks) Act, 1959, major state- associated banks were converted into subsidiary banks of State Bank of India.

At present, there are seven subsidiary banks of the State Bank of India:

(a) The State Bank of Bikaner and Jaipur;

(b) The State Bank of Hyderabad;

(d) The State Bank of Patiala;

(e) The State Bank of Saurashtra;

(f) The State Bank of Travancore; and

(g) The State Bank of Indore.

The State Bank of India holds not less than 55 per cent of the issued capital of each subsidiary bank.

Objectives and Functions of State Bank of India:

The State Bank of India has been established to operate on the normal commercial principles, with the only difference that, unlike other commercial banks in the country, it takes into consideration and responds in a progressively liberal manner the financial requirements of cooperative institutions and small scale industries, particularly in the rural areas of the country.

The main objectives of the State Bank are:

(i) To act in accordance with the broad economic policies of the government;

(ii) To encourage and mobilise savings by opening branches in rural and semi-urban areas and to promote rural credit;

(iii) To establish government partnership in the provision of cooperative credit;

(iv) To extend financial help for the establishment of licensed warehouses and cooperative marketing societies;

(v) To provide financial help to the small scale and cottage industries;

(vi) To provide remittance facilities to the banking institutions.

The State Bank of India acts as an agent of the Reserve Bank in all those places where the latter does not have its branches.

As an agent of the Reserve Bank, the State Bank performs the following functions:

(i) It acts as the government’s bank, i.e., it collects money and makes payments on behalf of the government and manages public debt.

(ii) It acts as the bankers’ bank. It receives deposits from and gives loans to commercial banks. It also acts as the clearing house for the commercial banks, rediscounts the bills of exchange of the commercial banks and provides remittance facilities to the commercial banks.

3. Ordinary Banking Functions:

The State Bank of India performs all kinds of commercial banking functions:

(i) It receives deposits from the public.

(ii) It gives loans and advances against eligible securities including goods, bills of exchange, promissory notes, fully paid shares of companies, immovable property or documents of title, debentures, etc.

(iii) It invests its surplus funds in government securities, railway securities and securities of corporations and treasury bills.

4. Other Functions:

The State Bank of India also performs the following other functions:

(i) It buys and sells gold and silver.

(ii) It acts as agent of cooperative banks.

(iii) It underwrites issues of stocks, shares, debentures, and other securities in which it is authorised to invest funds.

(iv) It administers, singly or jointly, estates for any purpose as executor, trustee or otherwise.

(v) It draws bills of exchange and grants letters of credit payable out of India.

(vi) It buys bills of exchange payable out of India with the approval of the Reserve Bank; it subscribes buys, acquires, holds and sells shares in the capital of banking companies.

5. Prohibited Functions:

The State Bank of India has been prohibited from doing certain businesses by the State Bank of India Act:

(i) The State Bank cannot grant loans against stocks and shares for a period more than six months.

(ii) It can purchase no immovable property other than its own offices.

(iii) It can neither rediscount nor offer loans against the security of exchange bills whose maturity period exceeds six months.

(iv) It cannot rediscount bills which do not carry at least two good signatures.

(v) It can neither discount bills nor grant credit to individuals or firms above the sanctioned limit.

Achievements of State Bank of India:

(A) General Progress:

The State Bank of India has made a tremendous progress since its inception in 1955.

Table 1 shows the progress of the bank in the fields of deposit mobilisation, credit expansion and branch expansion: i. Deposit Mobilisation:

There has been an increasing trend with regard to mobilisation of deposits by the State Bank of India. Total deposits and other accounts which were Rs. 226 crore at the end of 1955, increased to Rs.1227 crore at the end of 1969 and further to Rs. 242828 crore at the end of March 2001. Thus, there has been about 1075 times increase in Banks’s deposits during 1955 to 2001. ii. Credit Expansion:

The progress in the field of credit expansion has also been considerable over the years. At the end of 1955, total advances made by the State Bank were Rs. 106 crore. These advances increased to Rs. 841 crore in 1969 and Rs. 113590 crore in March 2001. This indicates that there has been 1072 times increase in advances during 1955 to 2001. iii. Branch Expansion:

The number of branches of the State Bank of India has also grown remarkably since its establishment. In 1955, the Bank had 497 offices, in 1969 and 2001, the number increased to 1673 and 9078 respectively. iv. Present Position of State Bank Group:

By the end of March 2001, total deposits of the State Bank Group (i.e., State Bank of India and its seven associates) had reached Rs. 312117 crore, total advances granted by the group were Rs. 150390 crore, and total number of branches of the Group was 13509.

Thus, the State Bank of India Group accounted for about 41 per cent of deposits, 35 per cent of advances and about 21 per cent of the offices of all scheduled commercial banks in India. The paid-up capital and reserves of the Group were Rs. 4751 crore at the end of March 1994. Net profits of the group were Rs. 2222 crore (Rs. 1604 crore of the SBI and Rs. 618 crore of the associate branches) during 2000-01. v. Profits, Efficiency and Capital Adequacy:

Over the years, the SBI continued to show better performance in terms of profits, efficiency and capital adequacy. It recorded a net profit of Rs. 1604 crore for the year 2000-01 against Rs. 832 crore for 1995-96, indicating an increase of 48%.

The major contributing factors for improved net profits were higher interest income from advances as well as investment operations, lower operating cost and better performance of foreign offices. The Bank’s capital to risk-weighted assets ratio was 12.79% during 2000-01. This is well above the internationally accepted ratio of 8%. Net NPA of the Bank was 6.03% in March 2001 against 6.41% in March 2000. vi. International Banking:

At present (March 2001), the SBI has a network of 52 overseas offices with their operations spread over 31 countries. These foreign offices mainly cater to the needs of the country’s foreign trade and provide foreign currency resources to the Indian corporates.

During 2000-01, the foreign offices of the SBI earned a net profit or Rs. 248 crore. The deposits and advances of the Bank’s foreign offices were Rs. 7932 crore and Rs. 14797 crore respectively at the end of March 2001. vii. Technology Upgradation and Consumer Services:

The State Bank of India (SBI) has taken significant initiatives in the fields of technology upgradation and better consumer services.

At present,the following major facilities in these areas are available:

(a) 2555 computerised branches operating in 620 centres and covering 76% of the Bank’s domestic business;

(b) Network of 100 ATMs in 8 cities;

(d) 360 VSATs linking 130 centres ;

(e) Tele-banking;

(f) Remote banking for corporates;

(g) State Bank electronic payment system (STEPS) to facilitate instantaneous electronic transfer of funds;

(h) Electronic Data Interchange projects for handling customer transactions at airports and seaports;

(i) Introduction of computerised printing of drafts;

(j) Electronic Nostra Account Reconciliation (ELENOR) enabling online reporting of forex transactions from 444 forex intensive branches;

(k) Extended business hours (7 to 12 hours) and 7 days banking.

Progress since 2001:

Table -2 shows the progress and performance of the State Bank of India since 2001:

(i) Paid up capital & reserves of the bank increased from Rs.15224 crore on 2001-2 to Rs.64986 crore in 2010-11.

(ii) Deposits of the bank increased from Rs. 270560 crore in 2001-2 to Rs. 933933 crore in 2010- 2011.

(iii) Advances of the bank increased from Rs. 120806 crore in 2001-2 to Rs. 756720 crore In 2010-11.

(iv) Number of domestic offices of the bank increased from 9034 in 2001-02 to 13542 in 2010- 11 and of foreign offices increased from 51 in 2001-02 to 1565 in 2010-11.

(v) Net profits of the bank increases from Rs. 2432 crore in 2001-02 to Rs. 8265 crore in 2010- 11.

(vi) Capital-adequacy ratio moved from 13.4% in 2001-2 to 10.7% in 2010-11.

(vii) Net NPA to net advances ratio has fallen from 5.6% in 2001-2 to 1.6% in 2010-11.

(B) State Bank and Rural Credit:

The State Bank had made remarkable progress in the field of rural credit. Since its establishment, it has been making tremendous efforts to develop rural credit by extending credit facilities to cooperative institutions and agriculturists.

Important measures undertaken by the State Bank to promote rural credit are as follows:

I. Expansion of Rural Branches:

The branch expansion of the State Bank has been largely rural – oriented. Out of the total 12486 branches of the State Bank Group at the end of March 1990, 5811 (i.e., 44.8%) were located in the rural areas with population less than 10,000; 3483 (i.e., 27.9%) were in semi-urban areas with population 10,000 to less than 1 lakh; and 3192 (i.e., 25.6%) in the urban areas and metropolitan cities.

II. Agricultural Finance:

The State Bank has been extending financial help to agriculture. In 1969, the total agricultural advances by the State Bank were Rs. 92 crore, which increased to Rs. 14982 crore in March 2001.

The State Bank of India has identified and is expanding its involvement in the following critical areas in agricultural lending:

(i) The Bank has contributed to the spread of minor irrigation schemes;

(ii) To increase productivity at the farm level, the Bank provides production finance directly to the farmers.

(iii) To develop dryland farming, the Bank- (a) grants loans for agricultural development in dryland areas, and (b) prepares and finances dryland farming projects in compact areas on the watershed basis.

(iv) The bank finances the farmers to install drip irrigation schemes in Karnataka, Tamil Nadu and Maharashtra.

(v) The Bank provides assistance to farmers to take up cultivation on waste lands under social forestry schemes for raising nurseries and planting of trees for fuel, fodder, etc.

(vi) The Bank provides financial help for modernising agricultural practices and raising farm productivity through the use of tractors and other agricultural implements.

III. Village Adoption Scheme:

The State Bank has undertaken a village adoption scheme. Under this scheme, a village is selected for development by meeting its complete financial requirements, including the requirements of the farmers, artisans and others.

The total number of villages adopted by the State Bank (other than those covered by the agricultural development banks) in 1987 was 54207. The total amount of credit and the number of farmers financed under this scheme stood at Rs. 1559 crore and 26.4 lakh respectively in March 1989.

IV. Integrated Rural Development Programme:

Integrated rural development scheme aims at all round and integrated development (i.e., economic, social, cultural, etc.) of the rural areas. The total loans disbursed by the State Bank upto the end of March 1999 under this programme amounted to Rs. 3212 crore spread over 69 lakh beneficiaries.

V. Regional Rural Banks:

Regional rural banks have been started with a view to provide credit to the small and marginal farmers and other weaker sections of the society. The State Bank is providing financial assistance to these banks. Upto the end of March 2001 the State Bank had sponsored 30 regional rural banks, covering 85 districts in the country.

VI. Agricultural Development Branches:

An important feature in the field of agricultural financing by the State Bank is the expansion of special agricultural development branches. These branches aim at financing all – round development of agriculture and function in close cooperation with Agricultural Refinance Development Corporation (ARDC), now called National Bank for Agriculture and Rural Development (NABARD). Upto March 1999, the Bank has contributed Rs. 1681 crore to NABARD.

VII. Remittance Facilities:

The State Bank provides liberalised remittance facilities to the institutions operating in the rural areas like state and central cooperative banks, land development banks, etc. With the implementation of the branch expansion programmes, the State Bank is now in a position to extend these liberalised remittance facilities more effectively to the rural and semi-urban areas.

VIII. Short-Term Credit to Cooperative Banks:

The State Bank has been providing short-term credit facilities to the state and central cooperative banks against government securities at a rate half per cent below the usual rate charged by it.

IX. Assistance to Land Development Banks:

The State Bank also gives financial assistance to the land development banks which provide long-term credit to agriculture:

(a) The State Bank subscribes to the debentures issued by the land development banks.

(b) The State Bank grants advances on the security of such debentures. This improves the marketability and popularity of these debentures in the money market.

X. Finance for Marketing and Processing Societies:

The State Bank gives direct financial help to marketing and processing cooperative societies in the areas where the central cooperative banks are not in a position to assist them. The marketing societies can get advance by pledging their produce at favourable prices. Processing cooperative societies such as cooperative sugar mills, cotton ginning and pressing societies, etc. are also provided similar credit facilities by the State Bank of India.

XI. Warehousing Finance:

Warehousing aims at scientific storage of the products and is essential for the development of agricultural marketing. The State Bank has been actively associated with the warehousing development scheme and provides advances against warehousing receipts.

It has also been making efforts to improve its procedures and terms with a view to promote and popularise the warehousing scheme. Moreover, the State Bank has permitted its officers to serve on the advisory committees for warehouses.

The State Bank of India has been extending financial help for the promotion of industrial growth in the economy.

Various forms of assistance to the industries by the Bank are given below:

I. Industrial Finance:

In tune with the rapid industrial growth in the country, the loans and advances of the State Bank to the industrial sector has shown substantial growth over the years. As compared to the amount of Rs. 9771 crore at the end of 1987, the advances to the industrial sector (including the small scale sector) increased to Rs.15519 crore at the end of March 1990.

Bank’s Corporate Banking Group:

It consists of three strategic business units, i.e.- (a) Corporate Accounts Group (CAG), (b) Leasing Strategic Business Units (Leasing SBU) and (c) Projects Finance Strategic Business Unit (Project Finance SBU).

(i) The CAG is a single window shop for the entire range of financial services needed for the large corporates. At present it caters to a more than 200 corporates in India. CAGs advances were Rs. 16943 crore at end March 2001.

(ii) The Leasing SBU performs its role as a leading provider of big-ticket leases to corporates.

(iii) The Project Finance SBU, an active infrastructure advisory services group, focuses on core and infrastructure sectors like power, telecommunications, oil and gas, roads, bridges, ports and urban infrastructure.

II. Finance to Small Scale Industries:

The State Bank of India’s finance to small scale industries has also increased substantially over the years. In 1969, the advances to small scale industries were Rs.104 crore, which increased to Rs. 12718 crore in March 2001. Similarly, the Bank’s small business finance increased from Rs. 7 crore in 1969 to Rs. 3711 crore in March 1998.

Other facilities provided by the Bank to small-scale and cottage and village industries are as given below:

(i) The Bank offers technical and financial consultancy to the units on its books to enable them to overcome problems of technological obsolescence, marketing, management, etc.

(ii) Under its Equity Fund Scheme, the Bank makes available the equity assistance in the form of interest – free loans repayable on a long – term basis to the needy entrepreneurs to set up new small- scale units.

(iii) The Bank conducts Entrepreneurial Development Programmes to promote entrepreneurship for the development of ancillaries near large project areas and of high – tech industries, such as electronics, computer peripherals, etc.

(iv) To assist the export efforts of the small – scale industrialists, arrangements have been made to extend the Whole Turnover Packing Credit Guarantee Scheme (WTPCG Scheme) to small – Scale industries from January 1, 1988.

(v) To increase opportunities for self – employment in the tertiary sector, the Bank provides finance to small business enterprises.

(vi) Project Uptech, set up by the Bank in 1988 for bringing about technology upgradation of small and medium enterprises, has taken up 19 projects upto March 2001. Six new projects are in the pipeline.

Conclusion:

The State Bank of India has been progressing well in the right direction. It has made remarkable achievements in the fields of expanding banking facilities in the rural and semi- urban areas, and providing financial help to agriculture, cooperative institutions and small scale industries.

UNIT - III BANKING REGULATION ACT, 1949

Banking Reforms and Regulations Bank is the main confluence that maintains and controls the “flow of money” to make the commerce of the land possible. Government uses it to control the flow of money by managing Cash Reserve Ratio (CRR) and thereby influencing the inflation level. The functions of the bank include accepting deposits from the public and other institutions and then to direct as loans and advances to parties mainly for growth and development of industries. It extends loans for the purpose of education, housing etc. and as a part of social duty, some percentage to Agricultural sector as decided by the RBI. The banks take the deposit at the lower rate of interest and give loans at the higher rates of interest. The difference in this transaction constitutes in number of banks the main source of income. Banking in India has undergone startling changes in terms of growth and structure. Organized Banking was active in India since the establishment of The General Bank of India in 1786. The Reserve Bank of India (RBI) was established as the central bank and in 1955. The Imperial bank of India, the biggest bank at that time, was taken over by the government to form State owned State Bank of India (SBI). RBI undertook an exercise to reduce the fragmentation in the Indian Banking Industry post-independence by merging weaker banks with stronger banks. The total number of banks reduced from 566 in 1951 to 85 in 1969.With the objective of reaching out to the masses and servicing credit needs of all sections of people, the government nationalized 14 large banks in 1969 followed by another six banks in 1980. This period saw the enormous growth in the number of branches and the bank’s branch network became wide enough to reach the weaker section of the society in a vast country like India. The economic reforms unleashed by the government in early nineties included banking sector too, to a significant extent. Entry of new private banks was permitted by RBI under specific guidelines. A number of liberalization and deregulation measures like efficiency, asset quality, capital adequacy and profitability have been introduced by the RBI to bring Indian banks in line with International best practices. With a view of giving the State owned banks operational flexibility and functional autonomy, partial privatization has been authorized as a first step, enabling them to reduce the stake of the government to 51%. Beside that a number of the legislation aims at protecting the interests of the depositors, ensuring control over the volume of credit, streamlining procedure, evolving uniform banking practices and developing banking on sound lines. The central banking enquiry committee stated that the banking institutions of a country serve as a repository of the cash resources of all classes of individuals and exercise a very powerful influence on the economic life of the people. Since banking business has come to be regarded as quasi-public in its nature warranting legislation to safeguard the interest of depositors, on whose confidence rests the entire banking structure of a nation and for ensuring and fostering the growth of banking on sound lines.

Legislation for safeguarding the business of banking companies most intensively was undertaken after the failure of the Travancore National and Quilon Bank. Between January 1937 and September 1948, three amendments to the Indian Companies Act were promoted. Meanwhile, a bill regulating the business of banking introduced in November 1944 lapsed in October 1945. Another bill introduced in March 1946 was withdrawn because of numerous amendments which were found necessary and reintroduced in March 1948. This final version of the bill as modified by the select committee became law, which effect from March 16, 1949.

(A) Banking Regulation Act 1949 Banking regulation act came in existence in 1949 with numerous provisions which may be classified into two categories: (i) built in safeguards and (ii) power and consequential functions and responsibilities of the Reserve Bank of India. The other important set of provisions pertains to the suspension of business by and winding up of banking companies. The provisions which fall in first category namely of built in safeguard relate to the organization management and operation of a banking company. The power and function of the RBI cover the entire gamut of operations of a bank and vest with adequate control and authority in this behalf. The organizational, managerial and operations safeguard can be further categorized and examined under the following subheads: I) Organizational Safeguard: i) Business of banking companies: In addition to the business of banking, banking company may engage in any one or more of the following forms of business (U/s 6), namely: (a) The borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling, of foreign exchange including foreign bank notes; the acquiring holding, issuing on commission, underwriting and dealing in stock, funds, shares debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities. (b) 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

24 customers, but excluding the business of a 1[managing agent or secretary and treasurer] of a company. (c) Contracting for public and private loans and negotiating and issuing the same; (d) The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; (e) Carrying on and transacting every kind of guarantee and indemnity business; (f) Managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) Acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) Undertaking and executing trusts; (i) Undertaking the administration of estates as executor, trustee or otherwise; (j) Establishing and supporting or aiding in the establishment and support of association, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and benevolent objects or for any exhibition or for any public, general or useful object; (k) The acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (m) Acquiring and undertaking the whole or any part of the business of any person or company, when such business is of nature enumerated or described in this sub-section; (n) Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) Any other forms 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. Section 6 further provides that a banking company cannot engage itself in any other type of business. The rigidity ;of this provisions is strengthened by those of section 8 which specifically prohibit a banking company from engaging itself in any trade or buying and selling of goods except for realization of any security held by it. These in brief are the limitations

25 which the act provides in respect of the business that a banking company may or may not transact.

Disposal of non-banking assets - Notwithstanding anything contained in Sec. 6, no banking company shall hold any immovable property, howsoever acquired, except such as is required for its own use, for any period exceeding seven years from the acquisition thereof or from the commencement of this Act, whichever is later or any extension of such period as in this section provided, and such property shall be disposed of within such period or extended period, as the case may be: Provided that the banking company may, within the period of seven years as aforesaid, deal or trade in any such property from the purpose of facilitating the disposal thereof. Provided further that the Reserve Bank may in any particular case extend the aforesaid period of seven years by such period not exceeding five years where it is satisfied that such extension would be in the interests of the depositors of the banking company.

Restriction on nature of subsidiary companies - A banking company shall not form any subsidiary company except a subsidiary company formed for one or more of the following purposes, namely: (a) the undertaking of any business which, under Cls. (a) to (o) of subsection (1) of Sec. 6, is permissible for a banking company to undertake, or (b) with the previous permission in writing of the Reserve Bank, the carrying on of the business of banking exclusively outside India, or (c) the undertaking of such other business, which the Reserve Bank may, with the prior approval of the Central Government, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in the public interest. No banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent of the paid-up share capital of that company or thirty per cent of its own paid-up share capital and reserves, whichever is less: Provided that any banking company which is on the date of the commencement of this Act holding any shares in contravention of the provisions of this sub-section shall not be liable to any penalty therefor if it reports the matter without delay to the Reserve Bank and if it brings its holding of shares into conformity with the said provisions within such period, not exceeding two years, as the Reserve Bank may think fit to allow. A banking company shall not, after the expiry of one year from the date of the commencement of this Act, hold shares, whether as pledgee, mortgagee or absolute owner, in any company in the management of which any Managing Director or manager of the banking company is in any manner concerned or interested.

Use of words "bank", "banker", "banking" or "banking company" - (1) No company other than a banking company shall use as part of its name 15[or, in connection with its business] any of the words "bank", "banker" or "banking" and no company shall carry on the business of banking in India unless it uses as part of its name at least one of such words. (2) No firm, individual or group of individuals shall, for the purpose of carrying on any business, use as part

26 of its or his name any of the words "bank", "banking" or "banking company". (3) Nothing in this section shall apply to- (a) a subsidiary of a banking company formed for one or more of the purposes mentioned in sub-section (1) of section 19, whose name indicates that it is a subsidiary of that banking company; (b) any association of banks formed for the protection of their mutual interests and registered under section 25 of the Companies Act, 1956.

II) Operational Safeguard: Operational sage guards are also provided in this Act which relate to (i) Maintenance of cash reserves assets in India, (ii) Grant of unsecured loans and advances and (iii) Opening of new branches.

Maintenance of liquid resources: It is essential for a bank to maintain a satisfactory liquid position and many a bank have run into difficulties and come to grief for non-observance of this prime requirement even though they were ultimately found to be solvent. In fact, "liquidity" is the very foundation of banking because it represents the faith or confidence that the general public have, that banks will always meet their obligations. It is this faith or confidence which enables banks to attract and retain deposits. A bank is able to inspire this confidence by demonstrating, inter alia, its ability to repay its deposits as and when required in accordance with the tenure of the deposits; sometimes a bank may find it necessary even to repay a time deposit before its maturity. Every bank must, therefore, maintain the required "liquidity" or cash resources. As has been humorously remarked, "if a cheque is to be returned for insufficient funds, it should be because of insufficient funds in the depositor's account and not insufficient funds on the part of the bank." The Act seeks to secure this healthy feature in the operations of commercial banks by prescribing a minimum liquidity ratio which they must maintain. As in the case of commercial banks, primary (urban) cooperative banks are also required to maintain certain amount of cash reserve and liquid assets. The scheduled primary (urban) cooperative banks are required to maintain with the Reserve Bank of India an average daily balance, the amount of which should not be less than 5 per cent of their net demand and time liabilities in India in terms of Section 42 of the Reserve Bank of India Act, 1934. Non-scheduled (urban) cooperative banks, under the provision of Section 18 of Banking Regulation Act, 1949 (As Applicable to Cooperative Societies) should maintain a sum equivalent to at least 3 per cent of their total demand and time liabilities in India on day-to-day basis. For scheduled cooperative banks, CRR is required to be maintained in accounts with Reserve Bank of India, whereas for non-scheduled cooperative banks, it can be maintained by way of either cash with themselves or in the form of balances in a current account with the Reserve Bank of India or the state co-operative bank of the state concerned or the central cooperative bank of the district concerned or by way of net balances in current accounts with public sector banks. In addition to the cash reserve, every primary (urban) cooperative bank (scheduled/non-scheduled) is required to maintain liquid assets in the form of cash, gold or unencumbered approved securities which should not be less than 25 per cent of the total of its demand and time liabilities in accordance with the provisions of Section 24 of the

Banking Regulation Act, 1949 (As Applicable to Cooperative Societies). Out of the prescribed SLR, the UCBs have been advised to maintain a certain amount in the form of SLR Securities as under:

Minimum SLR holding in Government and other approved securities as Sr.No. Category of bank percentage of Net Demand and Time Liabilities (NDTL) 1. Scheduled banks 25% Non-Scheduled banks 2. a) with NDTL of Rs.25 crore & above 15% b) with NDTL of less than Rs.25 crore 10%

The Act further requires that the assets in India of every banking company should not be less than 75 per cent of its demand and time liabilities in India. A banking company is also precluded from creating a floating charge on its assets and properties unless the creation of such charge is certified by the Reserve Bank as not being detrimental to the interests of the depositors of the banking company.

Unsecured and other loans and advances. The safeguards pertaining to loan and advances preclude a banking company from (a) granting advances against the security of its own shares, (b) granting unsecured advances of specified types and (c) writing offer remitting advances except with the prior approval of the Reserve Bank. A banking company cannot allow an unsecured advance to: · Any of its directors · To firms in which a director is a partner or guarantor · A private limited company in which a director is a managing · Agent or guarantor · Any individual where a director is a guarantor · To any company in which the chairman of the banking company is (i) a chairman or managing director, if such a company has no managing agent or (ii) the managing agent or director or partner of the managing agent of such company.

To mitigate the hardships of the above blanket restrictions on the grant of unsecured advances, the Act has deleted advances made against bills of exchange arising out of bona fide commercial or trade transactions, supply bills and trust receipts, from the purview of unsecured advances.

Apart from the restrictions on the grant of unsecured loans and advances, the Act has laid down that advances, both secured and unsecured outstanding against (i) a director of a bank (ii) any firm or company in which any of the directors is interested as director, partner, managing agent or guarantor and (iii) any individuals if any of the directors is his partner or guarantor, cannot be remitted or written off in whole or in part without the prior approval of the Reserve Bank.

Opening New Offices: The third operational safeguard relates to the opening of new offices by banks. The Act, provides that, without obtaining prior permission of the Reserve Bank, no banking company shall open a new place of business in India. Sec. 23 (2) of the Banking Regulation Act, 1949, clearly states: "Before granting any permission under this Section, the Reserve Bank may require to be satisfied by an inspection under Section 35 or otherwise as to the financial condition and history of the company, the general character of its management, the adequacy of its capital structure and earning prospects, and that public interest will be served by the opening or, as the case may be, change of location, of the place of business," of a banking institution. This Section of the Act inter alia laid stress on the financial management, the adequacy of capital and the earning prospects of the bank. Public convenience as regards the location was also stressed. The then existing circumstances must have forced the Reserve Bank to lay greater stress on the functioning and the soundness of the bank. An uneven development of banking in the different areas of the country was even at that time engaging the attention of the Reserve Bank; but the promotion and building up of good business practices were considered to be primary objectives.

Miscellaneous Provisions: These are in brief the organizational, managerial and operational safeguards provided in the Act in respect of banking companies. The provisions relating to paid- up capital and reserves and maintenance of liquid resources and assets in India do not apply to a banking company which has been refused a license or whose license has been cancelled or which has been prohibited from accepting fresh deposits under any compromise, arrangement or scheme sanctioned by a court. There are several other provisions which arise out of and/ or are ancillary to these safeguards. For example every banking company is, required to prepare its annual accounts comprising the balance sheet and profit and loss account in the forms prescribed under the Act. The accounts are required to be audited by a qualified auditor. The banking company is further required to publish its balance sheet and 'profit and loss account and to send copies thereof to the Reserve Bank of India as also to the Registrar of companies. Copies of such balance sheets and profit and loss account are also required to be displayed in a conspicuous place at its principal office and at its other offices.

Section 46 of the Act provides for punitive action against directions, officers and other persons for failure to comply with the provisions of the Banking Regulation Act. The offences for which punitive action can be taken are:

(i) willfully making a false statement or omitting a material statement in any retuin, balance sheet or other document; (ii) failure to produce books and records or answer questions during an inspection under section 35; (iii) receiving of deposits after a bank has been prohibited from accepting deposits; (i) failure to comply with any other provision of the Act.

Offences under the Banking Regulation Act so far have been neither serious nor numerous. The Reserve Bank usually does not take a serious view of petty contraventions which may have been the result of ignorance or inadvertence.

Objectives of Banking Regulation Act 1949 The Banking Act was enacted in February1949 with the following objectives: (i) The provision of the Indian Companies Act 1913 was found inadequate and unsatisfactory to regulate banking companies in India. Therefore a need was felt to have a specific legislation having comprehensive coverage on banking business in India. (ii) Due to inadequacy of capital many banks failed and hence prescribing a minimum capital requirement was felt necessary. The banking regulation act brought in certain minimum capital requirements for banks. (iii) One of the key objectives of this act was to avoid cut throat competition among banking companies. The act was regulated the opening of branches and changing location of existing branches. (iv) To prevent indiscriminate opening of new branches and ensure balanced development of banking companies by system of licensing. (v) Assign power to RBI to appoint, reappoint and removal of chairman, director and officers of the banks. This could ensure the smooth and efficient functioning of banks in India. (vi) To protect the interest of depositors and public at large by incorporating certain provisions, viz. prescribing cash reserve and liquidity reserve ratios. This enable bank to meet demand depositors.

(vii) Provider compulsory amalgamation of weaker banks with senior banks, and thereby strengthens the banking system in India. (viii) Introduce few provisions to restrict foreign banks in investing funds of Indian depositors outside India. (ix) Provide quick and easy liquidation of banks when they are unable to continue further or amalgamate with other banks.