Banks are vital to the prosperity and well-being of any society or country. Banks enable a society to create the platform for the satisfaction of wants of its people by managing and maintaining the flow of money to carry out transactions. The role of banks may be likened to the heart in a human being, circulating and managing money through the economy, thereby playing a crucial role for its good health.
Banks in India and their activities are regulated by the Banking Regulation Act, 1949.
Banking: Under Section 5(b) of the said Act “Banking” means,
➢ Accepting deposits of money from public for the purpose of lending or investing
➢ These deposits are repayable on demand or otherwise, and can be withdrawn by cheque, draft or otherwise.
1. RESERVE FUNDS
Every banking company incorporated in India is required to create a Reserve Fund and to transfer at least 25% of its profit to the reserve fund as per RBI notification (as against 20% prescribed in Banking Regulation Act). The profit of the year as per the profit and loss account prepared under Section 29 is to be taken as base for the purpose of such transfer and transfer to reserve fund should be made before declaration of any dividend. If any banking company makes any appropriation from the reserve fund or share premium account, it has to report to the Reserve Bank of India the reasons for such appropriation within 21 days.
2. RESTRICTION AS TO PAYMENT OF DIVIDEND
Before paying any dividend, a banking company has to write off completely all its capitalised expenses including preliminary expenses, organisation expenses, share-selling commission, brokerage, and amounts of losses incurred by tangible assets. However, a banking company may pay dividend on its shares without writing off –
1. the depreciation in the value of its investment in approved securities in any case where such depreciation has not actually been capitalised or accounted for as a loss.
2. the depreciation in the value of its investment in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor of the banking company.
3. the bad debts in any case where adequate provision for such debts had been made to the satisfaction of the auditor of the banking company.
3. CASH RESERVE
For smoothly meeting cash payment requirement, banks have to maintain certain minimum ready cash balances at all times. This is called as Cash Reserve Ratio (CRR). Cash reserve can be maintained by way of either a cash reserve with itself or as balance in a current account with the Reserve Bank of India or by way of net balance in current accounts or in one or more of the aforesaid ways. Every Scheduled Commercial Bank has to maintain cash reserve ratio (i.e. CRR) as per direction of the RBI issued under Section 42(IA) of the Reserve Bank of India Act, 1934.
4. LIQUIDITY NORMS
Banking companies have to maintain sufficient liquid assets in the normal course of business called as Statutory Liquidity Ratio (SLR). This safeguards the interest of depositors and prevents banks from over-extending their resources, liquidity norms have been settled and given statutory recognition.
The above assets have to be held at the close of business on any day and shall be valued at a price not exceeding the current market price of the above assets. The percentage of SLR is changed by the Reserve Bank of India from time to time considering the general economic conditions. This is in addition to the Cash Reserve Ratio balance which a scheduled bank is required to maintain under Section 42 of the Reserve Bank of India Act.
5. RESTRICTION ON ACQUISITION OF SHARES IN OTHER COMPANY
A banking company cannot form any subsidiary except for one or more of the following purposes:
1. The undertaking of any business permissible for banking company to undertake.
2. Carrying on business of banking, exclusively outside India with previous permission in writing, of the Reserve Bank.
3. The undertaking of such other business consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in the public interest, which the Reserve Bank of India may permit with prior approval of the Central Government. Other than formation of such subsidiary companies as mentioned above, a banking company cannot hold shares in any company either as pledge, mortgage, or absolute owner of an amount not exceeding 30% of the paid-up share capital of that company or 30% of its own paid-up share capital and reserves, whichever is less.
6. RESTRICTION ON LOANS AND ADVANCES
Under Section 20 of the Banking Regulations Act, a banking company shall not grant any loans or advances on the security of its own shares. Further, it cannot enter into any commitment for granting any loan or advance to or on behalf of –
(i) any of its directors.
(ii) any firm in which any of its directors is interested as partner, manager, employee or guarantor.
(iii) any company other than the subsidiary of the banking company, or a company which is entitled to dispense with the use of the word Ltd in its name under the Companies Act, or a Government company of which any of the directors of the banking company is a director, manager, employee or guarantor or in which he holds substantial interest.
(iv) any individual in respect of whom any of its directors is a partner or a guarantor.