BANKING INDIA

Thanks : Dheeraj K Antony (SSIM - Hyderabad)

Banking

Commercial Banking – An Overview:

Definition of Banking, Core Definition, business that can be undertaken and can not be undertaken by Banks in India.

Definition of Banking:

Banking has been defined in section 5 (b) of Banking Regulation Act,1949 as “ Accepting, for the purpose of lending  or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

Section 5C  defines a Banking Company as “ any company which transacts the business of banking in India”

The salient feature of the above definition are:

         A Banking company must perform both of the essential functions i.e. accepting deposits and lending or investing the same

                The Bank accepts deposits from anyone who offers his/her money for such purpose subject to the KYC norms

               The time and mode of withdrawal of deposit – it is repayable on demand by the depositor or according to the agreement reached between the Bank and Depositor. This means that the Bank does not refund the money deposited on its own, even if the period for which it was deposited expires. The depositor must make a demand for the same

The act also specifies that the withdrawal should be effected through an order, cheque, draft or otherwise. This implies that the demand should be made in a proper manner and through an instrument in writing and not merely by verbal order.

Name must include the word Bank, Banker or Banking. Section 7 of the act makes it essential for every company carrying on the business of banking in India  to use as part of its name at least one of the words – bank, banker, banking or banking company

•BUSINESS OF BANKS

•According to section 6, the following business may be undertaken by a banking company:

•A) Bulk of a bank’s activities and main functions:

•Borrowing or raising or taking money (Deposits)

•Lending or advancing of money either upon security or without security

•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

•Granting and issuing of letters of credit, travellers’ cheques and circular notes

•Buying, selling and dealing in bullion and specie

•Buying and selling of foreign exchange including foreign bank notes

•Acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, bonds, obligations, securities and investments of all kinds

•Purchasing and selling of bonds, scrips and other forms of securities on behalf of constituents or others

•Negotiating of loans and advances

•Receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise

•Providing safe deposit vaults and

•Collecting and transmitting on money and securities

•B) It may act as an agent of the Government, local authority or person and can carry on agency business but it can not act as secretary or treasurer of a company

•C) It may contract for public and private loans and negotiate and issue the same

•D) It may effect, insure, guarantee, underwrite, participate in managing and carrying out of any issue of State, municipal or other loans or of shares, stock, debenture stock of companies and may lend money for the purpose of any such issue

•E) It may carry on and transact every kind of guarantee and indemnity business

•F) It may manage, sell and realize any property which may come into its possession in satisfaction of its claims

•G) It may acquire and hold  and deal with any property or any right, title or interest in any such property which may form the security for any loan or advance

•H) It may undertake and execute trusts

•I) It may undertake the administration of estates as executor, trustee or otherwise

•J) It may establish, support and aid, associations, institutions, funds, trusts, etc., for the benefit of its present or past employees and may grant  money for charitable purposes

•K) It may acquire, construct and maintain any building for its own purpose

•L) It may sell, improve, manage, develop, exchange, lease, mortgage, dispose of all or any part of the property and rights of the economy

•M) It may acquire and undertake the whole or any part of the business of any person or company, when such business is of a nature described in Sec. 6(1)

•N) It may do all such things which are incidental or conducive to the promotion or advancement of the business of the company

•O) It may undertake any other form of business which the Central Government may specify as a form of business in which it is lawful for a banking company to engage. Recently the Govt., of India  has issued a notification specifying insurance as permissible form of business that could be undertaken by banks.

•Business prohibited for a Banking Company

•Section 8 prohibits a banking company from engaging directly or indirectly in trading activities and undertaking trading risks. No banking company shall directly or indirectly deal in buy or selling or bartering  of goods or engage in any trade  or buy, sell or barter goods for others. A Banking Company is permitted to so for the following purposes:

•To realize the securities given to it or held by it for a loan, if need arises for the realization of the amount lent

•To buy or sell or barter for others in connection with i) bills of exchange received for collection or negotiation, and ii) undertaking the administration of estates as executor, trustee, etc (under section 6(1)(i)

•Goods mean every kind of movable property other than claims, stocks, shares, money, bullion and specie and all instruments referred to in clause (a) of sub-section (1) of Section 6

•Section 9 of the act prohibits a banking company from holding any immovable property howsoever acquired, except as is required for its own use, for a period exceeding 7 years from the acquisition and for 12 years with permission from RBI. It has to dispose of such property.