Final projet

RBI REGULATORY MEASURES FOR COMMERCIAL BANKS
AND CO-OPERATIVE BANK

BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER V

Submitted

In Partial Fulfillment of the requirements
For the Award of the Degree of
Bachelor of Commerce – Banking & Insurance

By

SHIVANAND .S. MALED

ROLL NO. 28

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

C E R T I F I C A T E

This is to certify that Shri / Miss
_____________________________ of B.Com – Banking &
Insurance – Semester V (2008-09) has successfully completed
the project on _________________________
under the guidance of .

Course Coordinator Principal

Project Guide/ Internal Examiner

External Examiner

2
VES COLLEGE OF ARTS, SCIENCE AND COMMERCE


DECLARATION

I, __________________________________, the student of
B.Com – Banking & Insurance – Semester V (2008-09) hereby
declare that I have completed this project on
______________________________

The information submitted is true & original to the best of my
knowledge.

Student’s Signature

SHIVANAND .S. MALED

Roll No. 28

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ACKNOWLEDGEMENT

At the outset, I take the privilege to convey my gratitude to
those who have cooperated, supported, helped and suggested me
to accomplish the project work. I would like to thank University of
Mumbai for handing over this project to me. This project bears
imprint of many persons who are either directly or indirectly
involved in the completion of the project.

I would like to thanks my guide Prof. Mrs. MINAL GANDHI
for her valuable guidance throughout the Semester.

I would also like to thank our principal Mrs. J.K. PHADNIS and
our coordinator Prof. Mr. SACHIN BHANDARKAR for their
cooperation and help.

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EXECUTIVE SUMMARY

The Reserve Bank of India was constituted under section 3 of
the Reserve Bank of India Act, 1934 for taking over the
management of currency from the Central Government and
carrying on the business of banking in accordance with the
provisions of the Act. Originally, under the RBI Act, the Bank had
the responsibility of:
a. Regulating the issue of bank notes.
b. Keeping of reserves for ensuring monetary stability.
c. Generally to operate the currency and credit system of the
country to its advantage.

The role of the bank as regulator of banking sector is mainly by
virtue of the provisions of the Banking Regulation Act, 1949. In
exercise of the powers under that act, the bank regulates the entry
into banking business by licensing, exercises control over
shareholding and voting rights of shareholders, e-exercises
controls over the managerial persons and regulates the business
of banks. The bank also inspects banks and exercises supervisory
powers and may issue directions from time to time in public
interest of the banking system with respect to interest rates,
lending limits, investments and various other matters.

The major powers of the bank in the different roles as regulator
and supervisor can be summed as under:
a. Power to license.

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b. Power of appointment and removal of banking
boards/personnel.
c. Power to regulate the business of banks.
d. Power of give directions.
e. Power to inspect and supervise banks.
f. Power regarding audit of banks.
g. Powers to collect and furnish credit information.
h. Power relating to moratorium, amalgamation and winding up.
i. Powers to impose penalties.

A Co-operative Bank is a co-operative society engaged in
the business of banking and may be a primary Co-operative bank,
a distinct central co-operative bank or a state c-operative bank.
Co-operative banks operating in one state only are registered
under the State co-operative Societies Act concerned. The
formation of such banks as well as their management and control
over personnel is regulated by the co-operative law of the state.
The Registrar of co-operative societies under the Co-operative
Societies Act exercises a wide range of powers on co-operative
societies from registration to winding up.

With the introduction of section 56 in the banking regulation
act, 1949 with effect from 1965 co-operative banks have come
under the regulatory purview of the reserve bank. While the
formation and management of co-operative societies operating in
one state only are under the control of the State Government,
licensing and regulation of banking business rests with the
Reserve Bank over these banks.

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In the case of co-operative banks which are registered under
the Deposit Insurance and Credit Guarantee Corporation Act, the
Reserve Bank has the power to order their winding up. The
circumstances in which Reserve Bank may require winding up are
mentioned in Section 13D of the Act.

Commercial banks play an important role in directing the
affairs of the economy.

Commercial bank regulation involves three federal agencies
and fifty state agencies. Currently in most jurisdiction commercial
banks are regulated by Government entities and require a special
bank license to operate. Scheduled Commercial Banks are
required to maintain with RBI an average cash balance and
required to submit a provisional return in Form A.

These are the scheduled commercial banks, the regional
rural banks which operate in rural areas not covered by the
scheduled banks and the co-operative banks and special purpose
rural banks.

Banking regulation act, 1949 was enacted to consolidate and
amend the law relating to banking and to provide for a suitable
framework for regulating the banking companies. Initially the act
provided for regulation of banking companies only, but in 1965 the
Act was amended to cover Cooperative banks as well, with certain
modifications.

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INDEX

SR.NO PARTICULARS PAGE NO

1. CENTRAL BANKING 2

2. CENTRAL BANKING IN INDIA 15

3. TYPES OF BANKS 25

4. COMMERCIAL BANKS 26

5. CO-OPERATIVE BANKS 31

6. RELATIONSHIP BETWEEN THE COMMERCIAL 38
BANKS AND CO-OPERATIVE BANKS

7. BANKING REGULATION ACT, 1949 43

8. BANKING REGULATIONS FOR COMMERCIAL 46
BANKS
9. BANKING REGULATIONS FOR CO-OPERATIVE 55
BANKS
10. CONCLUSION 65

RBI REGULATORY MEASURES FOR
COMMERCIAL BANKS AND CO-OPERATIVE
BANK
8


RBI REGULATORY MEASURES FOR
COMMERCIAL BANKS AND CO-OPERATIVE
BANK

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INTRODUCTION TO CENTRAL BANKING

A central bank, reserve bank, or monetary authority is the
entity responsible for the monetary policy of a country or of a group
of member states. Its primary responsibility is to maintain the
stability of the national currency and money supply, but more
active duties include controlling subsidized-loan interest rates, and
acting as a "bailout" lender of last resort to the banking sector
during times of financial crisis (private banks often being integral to
the national financial system). It may also have supervisory
powers, to ensure that banks and other financial institutions do not
behave recklessly or fraudulently.

Most richer countries today have an "independent" central
bank, that is, one which operates under rules designed to prevent
political interference. Examples include the European Central Bank
and the U.S. Federal Reserve. Some central banks are publicly
owned, and others are privately owned. In practice, there is little
difference between public and private ownership, since in the latter
case almost all profits of the bank are paid to the government
either as a tax or a transfer to the government.

Activities and responsibilities

Functions of a central bank (not all functions are carried out
by all banks):

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• Implementation of monetary policy
• Controls the nation's entire money supply
• The Government's banker and the bankers' bank ("Lender of
Last Resort")
• Manages the country's foreign exchange and gold reserves and
the Government's stock register;
• Regulation and supervision of the banking industry:
• Setting the official interest rate - used to manage both
inflation and the country's exchange rate - and ensuring that this
rate takes effect via a variety of policy mechanisms

MONETARY POLICY

Central banks implement a country's chosen monetary
policy. At the most basic level, this involves establishing what form
of currency the country may have, whether a fiat currency, gold-
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backed currency (disallowed for countries with membership of the
IMF), currency board or a currency union. When a country has its
own national currency, this involves the issue of some form of
standardized currency, which is essentially a form of promissory
note: a promise to exchange the note for "money" under certain
circumstances. Historically, this was often a promise to exchange
the money for precious metals in some fixed amount. Now, when
many currencies are fiat money, the "promise to pay" consists of
nothing more than a promise to pay the same sum in the same
currency.

The ECB building in Frankfurt

In many countries, the central bank may use another
country's currency either directly (in a currency union), or indirectly,
by using a currency board. In the latter case, local currency is
directly backed by the central bank's holdings of a foreign currency

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in a fixed-ratio; this mechanism is used, notably, in Hong Kong and
Estonia.
In countries with fiat money, monetary policy may be used as a
shorthand form for the interest rate targets and other active
measures undertaken by the monetary authority.

Currency Issuance

Many central banks are "banks" in the sense that they hold
assets (foreign exchange, gold, and other financial assets) and
liabilities. A central bank's primary liabilities are the currency
outstanding, and these liabilities are backed by the assets the
bank owns.
Central banks generally earn money by issuing currency
notes and "selling" them to the public for interest-bearing assets,
such as government bonds. Since currency usually pays no
interest, the difference in interest generates income. In most
central banking systems, this income is remitted to the
government. The European Central Bank remits its interest income
to its owners, the central banks of the member countries of the
European Union.
Although central banks generally hold government debt, in
some countries the outstanding amount of government debt is
smaller than the amount the central bank may wish to hold. In
many countries, central banks may hold significant amounts of
foreign currency assets, rather than assets in their own national
currency, particularly when the national currency is fixed to other
currencies.

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Naming of central banks

There is no standard terminology for the name of a central
bank, but many countries use the "Bank of Country" form (e.g.,
Bank of England, Bank of Canada, Bank of Russia). Some are
styled "national" banks, such as the National Bank of Ukraine; but
the term "national bank" is more often used by privately-owned
commercial banks, especially in the United States. In other cases,
central banks may incorporate the word "Central" (e.g. European
Central Bank, Central Bank of Ireland). Many countries have state-
owned banks or other quasi-government entities that have entirely
separate functions, such as financing imports and exports.

Interest Rate Interventions

Typically a central bank controls certain types of short-term
interest rates. These influence the stock- and bond markets as well
as mortgage and other interest rates. The European Central Bank
for example announces its interest rate at the meeting of its
Governing Council (in the case of the Federal Reserve, the Board
of Governors).

Both the Federal Reserve and the ECB are composed of one
or more central bodies that are responsible for the main decisions
about interest rates and the size and type of open market
operations, and several branches to execute its policies. In the

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case of the Fed, they are the local Federal Reserve Banks, for the
ECB they are the national central banks.

Policy Instruments

The main monetary policy instruments available to central
banks are open market operation, bank reserve requirement,
interest rate policy, re-lending and re-discount (including using the
term repurchase market), and credit policy (often coordinated with
trade policy). While capital adequacy is important, it is defined and
regulated by the Bank for International Settlements, and central
banks in practice generally do not apply stricter rules.

To enable open market operations, a central bank must hold
foreign exchange reserves (usually in the form of government
bonds) and official gold reserves. It will often have some influence
over any official or mandated exchange rates: Some exchange
rates are managed, some are market based (free float) and many
are somewhere in between ("managed float" or "dirty float").

Interest Rates

By far the most visible and obvious power of many modern
central banks is to influence market interest rates; contrary to
popular belief, they rarely "set" rates to a fixed number. Although
the mechanism differs from country to country, most use a similar
mechanism based on a central bank's ability to create as much fiat
money as required.

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The mechanism to move the market towards a 'target rate'
(whichever specific rate is used) is generally to lend money or
borrow money in theoretically unlimited quantities, until the
targeted market rate is sufficiently close to the target. Central
banks may do so by lending money to and borrowing money from
(taking deposits from) a limited number of qualified banks, or by
purchasing and selling bonds. As an example of how this
functions, the Bank of Canada sets a target overnight rate, and a
band of plus or minus 0.25%. Qualified banks borrow from each
other within this band, but never above or below, because the
central bank will always lend to them at the top of the band, and
take deposits at the bottom of the band; in principle, the capacity to
borrow and lend at the extremes of the band are unlimited. [1] Other
central banks use similar mechanisms.

It is also notable that the target rates are generally short-term
rates. The actual rate that borrowers and lenders receive on the
market will depend on (perceived) credit risk, maturity and other
factors.

A typical central bank has several interest rates or monetary
policy tools it can set to influence markets.

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• Marginal Lending Rate (currently 5.00% in the Eurozone) A
fixed rate for institutions to borrow money from the CB.(In the
US this is called the Discount rate).
• Main Refinancing Rate (4.25% in the Eurozone): This is the
publicly visible interest rate the central bank announces. It is
also known as Minimum Bid Rate and serves as a bidding floor
for refinancing loans. (In the US this is called the Federal funds
rate).
• Deposit Rate (3.00% in the Eurozone): The rate parties receive
for deposits at the CB.

These rates directly affect the rates in the money market, the
market for short-term loans.

Open Market Operations

Through open market operations, a central bank influences
the money supply in an economy directly. Each time it buys
securities, exchanging money for the security, it raises the money
supply. Conversely, selling of securities lowers the money supply.
Buying of securities thus amounts to printing new money while
lowering supply of the specific security.

The main open market operations are:

• Temporary lending of money for collateral securities ("Reverse
Operations" or "repurchase operations", otherwise known as the
"repo" market). These operations are carried out on a regular

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basis, where fixed maturity loans (of 1 week and 1 month for the
ECB) are auctioned off.
• Buying or selling securities ("direct operations") on ad-hoc
basis.
• Foreign exchange operations such as forex swaps.

All of these interventions can also influence the foreign
exchange market and thus the exchange rate.

Capital Requirements

All banks are required to hold a certain percentage of their
assets as capital, a rate which may be established by the central
bank or the banking supervisor. For international banks, including
the 55 member central banks of the Bank for International
Settlements, the threshold is 8% (see the Basel Capital Accords)
of risk-adjusted assets, whereby certain assets (such as
government bonds) are considered to have lower risk and are
either partially or fully excluded from total assets for the purposes
of calculating capital adequacy. Partly due to concerns about asset
inflation and repurchase agreements, capital requirements may be
considered more effective than deposit/reserve requirements in
preventing indefinite lending: when at the threshold, a bank cannot
extend another loan without acquiring further capital on its balance
sheet.

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Reserve Requirements

Another significant power that central banks hold is the ability
to establish reserve requirements for other banks. By requiring that
a percentage of liabilities be held as cash or deposited with the
central bank (or other agency), limits are set on the money supply.

In practice, many banks are required to hold a percentage of
their deposits as reserves. Such legal reserve requirements were
introduced in the nineteenth century to reduce the risk of banks
overextending themselves and suffering from bank runs, as this
could lead to knock-on effects on other banks. As the early 20th
century gold standard and late 20th century dollar hegemony
evolved, and as banks proliferated and engaged in more complex
transactions and were able to profit from dealings globally on a
moment's notice, these practices became mandatory, if only to
ensure that there was some limit on the ballooning of money
supply. Such limits have become harder to enforce. The People's
Bank of China retains (and uses) more powers over reserves
because the yuan that it manages is a non-convertible currency.

Even if reserves were not a legal requirement, prudence
would ensure that banks would hold a certain percentage of their
assets in the form of cash reserves. It is common to think of
commercial banks as passive receivers of deposits from their
customers and, for many purposes, this is still an accurate view.

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Exchange Requirements

To influence the money supply, some central banks may
require that some or all foreign exchange receipts (generally from
exports) be exchanged for the local currency. The rate that is used
to purchase local currency may be market-based or arbitrarily set
by the bank. This tool is generally used in countries with non-
convertible currencies or partially convertible currencies. The
recipient of the local currency may be allowed to freely dispose of
the funds, required to hold the funds with the central bank for some
period of time, or allowed to use the funds subject to certain
restrictions. In other cases, the ability to hold or use the foreign
exchange may be otherwise limited.

In this method, money supply is increased by the central
bank when the central bank purchases the foreign currency by
issuing (selling) the local currency. The central bank may
subsequently reduce the money supply by various means,
including selling bonds or foreign exchange interventions.

Margin Requirements And Other Tools

In some countries, central banks may have other tools that
work indirectly to limit lending practices and otherwise restrict or
regulate capital markets. For example, a central bank may regulate
margin lending, whereby individuals or companies may borrow
against pledged securities. The margin requirement establishes a

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minimum ratio of the value of the securities to the amount
borrowed.

Central banks often have requirements for the quality of
assets that may be held by financial institutions; these
requirements may act as a limit on the amount of risk and leverage
created by the financial system. These requirements may be
direct, such as requiring certain assets to bear certain minimum
credit ratings, or indirect, by the central bank lending to
counterparties only when security of a certain quality is pledged as
collateral.

Banking Supervision And Other Activities

In some countries a central bank through its subsidiaries
controls and monitors the banking sector. In other countries
banking supervision is carried out by a government department
such as the UK Treasury, or an independent government agency.
It examines the banks' balance sheets and behavior and policies
toward consumers. Apart from refinancing, it also provides banks
with services such as transfer of funds, bank notes and coins or
foreign currency. Thus it is often described as the "bank of banks".

Many countries such as the United States will monitor and
control the banking sector through different agencies and for
different purposes, although there is usually significant cooperation
between the agencies.

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Any cartel of banks is particularly closely watched and
controlled. Most countries control bank mergers and are wary of
concentration in this industry due to the danger of groupthink and
runaway lending bubbles based on a single point of failure, the
credit culture of the few large banks.

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CENTRAL BANKING IN INDIA RBI

Establishment
The Reserve Bank of India was established on April 1, 1935
in accordance with the provisions of the Reserve Bank of India Act,
1934.
The Central Office of the Reserve Bank was initially
established in Calcutta but was permanently moved to Mumbai in
1937. The Central Office is where the Governor sits and where
policies are formulated.
Though originally privately owned, since nationalization in
1949, the Reserve Bank is fully owned by the Government of India.

Preamble
The Preamble of the Reserve Bank of India describes the
basic functions of the Reserve Bank 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."

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Central Board
The Reserve Bank's affairs are governed by a central board of
directors. The board is appointed by the Government of India in
keeping with the Reserve Bank of India Act.
• Appointed/nominated for a period of four years
• Constitution.

Financial Supervision
The Reserve Bank of India performs this function under the
guidance of the Board for Financial Supervision (BFS). The Board
was constituted in November 1994 as a committee of the Central
Board of Directors of the Reserve Bank of India.

Objective
Primary objective of BFS is to undertake consolidated
supervision of the financial sector comprising commercial banks,
financial institutions and non-banking finance companies.

Constitution
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.

Current Focus
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• Supervision of financial institutions
• Consolidated accounting
• Legal issues in bank frauds
• Divergence in assessments of non-performing assets and
• Supervisory rating model for banks

Main Functions

Monetary Authority:
• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability and ensuring adequate
flow of credit to productive sectors.

Regulator And Supervisor Of The Financial System:
• Prescribes broad parameters of banking operations within
which the country's banking and financial system functions.
• Objective: maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking
services to the public.

Issuer Of Currency:
• Issues and exchanges or destroys currency and coins not fit
for circulation.
• Objective: to give the public adequate quantity of supplies of
currency notes and coins and in good quality.

Functions of Reserve Bank:-
The Reserve Bank of India Act of 1934 entrust all the
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important functions of a central bank the Reserve Bank of India.

BANK OF ISSUE
Under Section 22 of the Reserve Bank of India Act, the Bank
has the sole right to issue bank notes of all denominations. The
distribution of one rupee notes and coins and small coins all over
the country is undertaken by the Reserve Bank as agent of the
Government. The Reserve Bank has a separate Issue Department
which is entrusted with the issue of currency notes. The assets
and liabilities of the Issue Department are kept separate from
those of the Banking Department. Originally, the assets of the
Issue Department were to consist of not less than two-fifths of gold
coin, gold bullion or sterling securities provided the amount of gold
was not less than Rs. 40 crores in value. The remaining three-fifths
of the assets might be held in rupee coins, Government of India
rupee securities, eligible bills of exchange and promissory notes
payable in India. Due to the exigencies of the Second World War
and the post-war period, these provisions were considerably
modified. Since 1957, the Reserve Bank of India is required to
maintain gold and foreign exchange reserves of Ra. 200 crores, of
which at least Rs. 115 crores should be in gold. The system as it
exists today is known as the minimum reserve system.

Banker to Government:-
The second important function of the Reserve Bank of India
is to act as Government banker, agent and adviser. The Reserve
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Bank is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir. The
Reserve Bank has the obligation to transact Government business,
via. to keep the cash balances as deposits free of interest, to
receive and to make payments on behalf of the Government and to
carry out their exchange remittances and other banking
operations. The Reserve Bank of India helps the Government -
both the Union and the States to float new loans and to manage
public debt. The Bank makes ways and means advances to the
Governments for 90 days. It makes loans and advances to the
States and local authorities. It acts as adviser to the Government
on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort:-
The Reserve Bank of India acts as the bankers' bank.
According to the provisions of the Banking Companies Act of 1949,
every scheduled bank was required to maintain with the Reserve
Bank a cash balance equivalent to 5% of its demand liabilites and
2 per cent of its time liabilities in India. By an amendment of 1962,
the distinction between demand and time liabilities was abolished
and banks have been asked to keep cash reserves equal to 3 per
cent of their aggregate deposit liabilities. The minimum cash
requirements can be changed by the Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of India
on the basis of eligible securities or get financial accommodation in
times of need or stringency by rediscounting bills of exchange.

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Since commercial banks can always expect the Reserve Bank of
India to come to their help in times of banking crisis the Reserve
Bank becomes not only the banker's bank but also the lender of
the last resort.

Controller of Credit:-
The Reserve Bank of India is the controller of credit i.e. it has
the power to influence the volume of credit created by banks in
India. It can do so through changing the Bank rate or through open
market operations. According to the Banking Regulation Act of
1949, the Reserve Bank of India can ask any particular bank or the
whole banking system not to lend to particular groups or persons
on the basis of certain types of securities. Since 1956, selective
controls of credit are increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more
powers to control the Indian money market. Every bank has to get
a licence from the Reserve Bank of India to do banking business
within India, the licence can be cancelled by the Reserve Bank of
certain stipulated conditions are not fulfilled. Every bank will have
to get the permission of the Reserve Bank before it can open a
new branch. Each scheduled bank must send a weekly return to
the Reserve Bank showing, in detail, its assets and liabilities. This
power of the Bank to call for information is also intended to give it
effective control of the credit system. The Reserve Bank has also
the power to inspect the accounts of any commercial bank.

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As supreme banking authority in the country, the Reserve
Bank of India, therefore, has the following powers:

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative
and qualitative controls.

(c) It controls the banking system through the system of licensing,
inspection and calling for information.

(d) It acts as the lender of the last resort by providing rediscount
facilities to scheduled banks.

Custodian of Foreign Reserves:-
The Reserve Bank of India has the responsibility to maintain
the official rate of exchange. According to the Reserve Bank of
India Act of 1934, the Bank was required to buy and sell at fixed
rates any amount of sterling in lots of not less than Rs. 10,000.
The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the
Bank was able to maintain the exchange rate fixed at lsh.6d.
Though there were periods of extreme pressure in favour of or
against

The rupee. After India became a member of the International
Monetary Fund in 1946, the Reserve Bank has the responsibility of
maintaining fixed exchange rates with all other member countries
of the I.M.F

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Besides maintaining the rate of exchange of the rupee, the
Reserve Bank has to act as the custodian of India's reserve of
international currencies. The vast sterling balances were acquired
and managed by the Bank. Further, the RBI has the responsibility
of administering the exchange controls of the country.

Supervisory functions:-
In addition to its traditional central banking functions, the
Reserve bank has certain non-monetary functions of the nature of
supervision of banks and promotion of sound banking in India. The
Reserve Bank Act, 1934, and the Banking Regulation Act, 1949
have given the RBI wide powers of supervision and control over
commercial and co-operative banks, relating to licensing and
establishments, branch expansion, liquidity of their assets,
management and methods of working, amalgamation,
reconstruction, and liquidation. The RBI is authorised to carry out
periodical inspections of the banks and to call for returns and
necessary information from them. The nationalisation of 14 major
Indian scheduled banks in July 1969 has imposed new
responsibilities on the RBI for directing the growth of banking and
credit policies towards more rapid development of the economy
and realisation of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in
improving the standard of banking in India to develop on sound
lines and to improve the methods of their operation.

Classification of RBIs functions:-

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The monetary functions also known as the central banking
functions of the RBI are related to control and regulation of money
and credit, i.e., issue of currency, control of bank credit, control of
foreign exchange operations, banker to the Government and to the
money market. Monetary functions of the RBI are significant as
they control and regulate the volume of money and credit in the
country.

Equally important, however, are the non-monetary functions
of the RBI in the context of India's economic backwardness. The
supervisory function of the RBI may be regarded as a non-
monetary function (though many consider this a monetary
function). The promotion of sound banking in India is an important
goal of the RBI, the RBI has been given wide and drastic powers,
under the Banking Regulation Act of 1949 - these powers relate to
licencing of banks, branch expansion, liquidity of their assets,
management and methods of working, inspection, amalgamation,
reconstruction and liquidation. Under the RBI's supervision and
inspection, the working of banks has greatly improved.
Commercial banks have developed into financially and
operationally sound and viable units. The RBI's powers of
supervision have now been extended to non-banking financial
intermediaries. Since independence, particularly after its
nationalisation 1949, the RBI has followed the promotional
functions vigorously and has been responsible for strong financial
support to industrial and agricultural development in the country.

Subsidiaries:-

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Fully owned: National Housing Bank (NHB), Deposit
Insurance and Credit Guarantee Corporation of India(DICGC),
Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)
Majority stake: National Bank for Agriculture and Rural
Development (NABARD) The Reserve Bank of India has recently
divested its stake in State Bank of India to the Government of
India.

TYPES OF BANKS

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RESERVE
BANK OF
INDIA

COMMERC- CO-
IAL BANKS OPERATIVE
BANKS

STATE CO- STATE
PUBLIC PRIVATE LAND DEVE
OPERATIVE
BANK BANK BANK CO-OP.
BANK

CENTRAL CENTRAL
SCHEDULE SCHEDULE CO- LAND CO-
BANKS BANKS OPERATIVE OPERATIVE

NON NON PRIMARY
SCHEDULE SCHEDULE AGRICULTU
BANKS BANKS RE CREDIT
SOCIETY

FARMER
SERVICES
SOCIETY

PRIMARY
URBAN CO-
OPERATIVE

COMMERCIAL BANKS

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Introduction

Commercial bank plays an important role in directing the
affairs of the economy in various ways as a matter of fact the
operation of commercial banks record the economic pulse of the
country. In 19th century economist David Ricardo had stated that a
bank was a dealer or transactor in money. Banks are thus financial
intermediaries collecting “deposits” and “loans”. But now they are
not only the purveyors of money but also the creator or
manufacturer of money in a financial system. It is the banks who
set the temps of aggregate activity in any economy.

Commercial banks are the financial institution dealing with
other’s money. Though it was meant for receiving deposits and
granting loans, but in the present day world they play a varieties of
roles and contribute a lot to the financial sector.

Banking has a major share in the world finance industry.
Commercial banks play a significant role in country’s financial
market. Opening policies adopted by the countries of the world
have given opportunities to the commercial banks to operate
globally in an environment of ore competition. Commercial banks
can be simply defined as the institution dealing with other’s money.

Meaning of commercial bank

34


A commercial bank is a type of financial intermediary and a
type of bank. It raises funds by collecting deposits from businesses
and consumers via checkable deposits, savings and time (or term)
deposits. It makes loans to businesses and consumers. It also
buys corporate bonds and government bonds. Its primary liabilities
are deposits and primary assets are loans and bonds.

A modern commercial bank reforms many reform. It renders
many services to its customers and to the public.

Scheduled commercial banks & non – scheduled banks
banking regulation act of India, 1949 defines banking as
“accepting, for the purpose of lending or investments of deposits of
money from the public, repayable on demand or otherwise and
withdraw able by cheques, draft and other or otherwise.

Developments in Commercial Banking

35


This provides a detailed account of the various policy
measures undertaken by the Reserve Bank during 2005-06 and
some major developments up to October 31, 2006. These relate to
monetary policy, credit delivery, regulation and supervision,
customer service, financial inclusion, payments and settlement
systems, technological developments and legal reforms. The
objective of various policy measures has been to ensure an
efficient and stable financial system for sustaining the growth
momentum, and to expand banking services to all sections of
society. Major policy initiatives undertaken by the Reserve Bank
include allowing banks to raise capital through innovative
instruments, advising banks to open ‘no frills’ accounts with nil or
low balances, one-time settlement scheme for SME accounts,
guidelines on securitisation of standard assets and sale/purchase
of NPAs, and introduction of the national electronic funds transfer
(NEFT) system.

Operations and Performance of Commercial Banks

This defines the operations and financial performance of
scheduled commercial banks, at the aggregate and bank group
levels, based on their audited balance sheets. The analysis in this
Chapter covers important aspects such as trends in overall bank
credit, credit to the priority sector, lending to sensitive sectors,
investment portfolio, trends in deposits, structure of interest rates,
financial performance and soundness parameters, extent of
technology application and regional spread of scheduled
commercial banks. The Chapter also covers the operations of

36


scheduled commercial banks in the capital market. An analysis of
the balance sheet parameters and financial performance of
regional rural banks is presented. Finally, the financial
performance of the four local area banks is also covered.

The main points emerging from the analysis are:

• Bank credit growth remained robust for the second year in
succession.
• Credit growth turned more broad-based even as credit
expansion was more pronounced in respect of retail sector,
particularly housing and loans to commercial real estate.
• Net accretion to deposits was lower than expansion in credit,
with banks having to partially unwind their holdings of
Government securities.
• Net profits of scheduled commercial banks, as a group,
increased during the year as against the decline in the
previous year due mainly to a turnaround in non-interest
income.
• Gross NPAs and net NPAs declined significantly during the
year and are now comparable with global levels.
• Banks' capital to risk weighted assets ratio remained more or
less at the previous year's level, despite application of capital
charge for market risk; significant increase in risk-weighted
assets and increase in risk-weights for certain sensitive
sectors. This, to an extent, was facilitated by large resources
raised by banks from the capital market.

37


• Till October 31, 2006, 137 RRBs were consolidated to form
43 new RRBs, sponsored by 18 banks in 15 States, bringing
down the total number of RRBs all over India from 196 at
end-March 2005 to 102.

38


CO-OPERATIVE BANK

INTRODUCTION

The co-operative banks have a history of almost 100 years.
The co-operative banks are an important constituent of the Indian
Financial System, judging by the role assigned to them, the
expectations they are supposed to fulfill, their number, and the
number of offices they operate. The co-operative movement
originated in the West, but the importance that such banks have
assumed in India is rarely paralleled anywhere else in the world.
Their role in rural financing continues to be important even today,
and their business in the urban areas has increased phenomenally
in recent years mainly due to the sharp increase in the numbers of
primary co – operative.

Co-operative banks play an important role in the Indian
Financial System, especially at the village level. The growth of
cooperative movement commenced with the passing of the act of
1904, which officially launched this movement in India. The act
provided an easy legal framework for their formation as well as
governance by making the co-operative banks free from the
complicated provisions of the Indian Companies Act.

While the co-operative banks in rural areas mainly finance
agricultural based activities including farming, cattle, milk,
hatchery, personal finance etc along with some small scale
industries and self – employment driven activities.

39


The co-operative banks in urban areas mainly finance
various categories of people for self – employment, industries,
small-scale units, home finance, consumer finance, personal
finance etc.

Some of the co-operative banks are quite forward looking
and have developed sufficient core competencies to challenge
state and private sector banks.

According to NAFCUB the total deposits & lending’s of Co-
operative Banks in much ore than Old Private Sector Banks & also
the New Private Sector Banks. This exponential growth of Co-
operative Banks is attributed mainly to their much better local
reach, personal interaction with customers, and their ability to
catch the nerve of the local clientele.

Though registered under the Co-Operative Societies Act of
the Respective States (where formed originally) the banking
related activities of the co-operative banks area also regulated by
the reserve bank of India. They are governed by the Banking
Regulations Act 1949 And Banking Laws (Co-Operative Societies)
Act, 1965

40


STRUCTURE OF CO-OPERATIVE BANK

CO-OPERATIVE
BANK
INSTITUTION

URBAN CO- RURAL CO-
OPERATIVE BANK OPERATIVE BANK

SCHEDULED NON- SCHEDULED
SHORT - TERM LONG - TERM
U.C.BANK U.C.BANK

STATE CO-
MUTLI STATE
OPERTIVE BANK

DISTRICT CO-
SINGLE STATE
OPERATIVE BANK

PRIMARY
AGICULTURE CO-
OPERATIVE BANK

41


Developments in Co-operative Banking

The outlines major policy initiatives, and operations and
performance of various segments of the co-operative credit
institutions in India, i.e., urban co-operative banks (UCBs) and
rural co-operative credit institutions. The data coverage for UCBs
has been widened to include complete balance sheet information
in respect of both scheduled and non-scheduled UCBs. Besides,
the analysis also covers non-scheduled UCBs with deposit size of
Rs.100 crore and above. The Chapter also covers, for the first
time, information on balance sheet, financial performance and
asset quality of State Co-operative Agriculture and Rural
Development Banks (SCARDBs) and Primary Co-operative
Agriculture and Rural Development Banks (PCARDBs).
The policy initiatives for UCBs during 2005-06 were guided
by the ‘Vision Document’ for revival of UCBs. Eight States have
entered into Memoranda of Understanding with the Reserve Bank
so far. As envisaged in the ‘Vision Document’ a differentiated
approach to regulation has been adopted with regulatory
forbearance for the smaller UCBs while at the same time
strengthening their operations. Regulatory measures undertaken
during the year related to improving credit delivery mechanism,
strengthening prudential norms, improving customer service and
enhancing business opportunities.
The major points emerging from the analysis of balance sheet,
financial performance and soundness indicators in this Chapter are
as follows:

42


• Assets of urban co-operative banks (both scheduled and
non-scheduled) increased moderately during 2005-06.
• Total assets of scheduled urban co-operative banks
increased at a higher rate during 2005-06 in comparison with
2004-05.
• Net profits of scheduled UCBs more than doubled during
2005-06 in contrast to a decline in the previous year.
• Asset quality of UCBs improved significantly during 2005-06.
• All segments of the rural co-operative sector were able to
expand their business operations during 2004-05. However,
their financial performance varied across the institutions.
• Within the short-term structure, while the state co-operative
banks (StCBs) earned lower profits, the district central co-
operative banks (DCCBs) recorded higher profits. Primary
agricultural credit societies (PACS), on the whole, continued
to incur overall losses, although a sizable number of them
earned profit during 2004-05. In the case of long-term
structure, while the SCARDBs continued to incur losses,
PCARDBs staged a turnaround during 2004-05.
• Asset quality of short-term structure of rural co-operative
banks including StCBs, DCCBs and PACS improved, while
that of long-term institutions including SCARDBs and
PCARDBs declined.
• The SHG-Bank linkage programme continued with 0.6 million
new SHGs having been credit linked by the banking system
during 2005-06, benefiting over 32.9 million poor families at
end-March 2006.

43


Regulatory Environment

The urban co-operative banks are regulated and supervised
by State Registrars of Co-operative Societies, Central Registrar of
Co-operative Societies in case of Multi-state co-operative banks
and by Reserve Bank. The Registrars of Co-operative Societies of
the States exercise powers under the respective Co-operative
Societies Act of the States in regard to incorporation, registration,
management, amalgamation, reconstruction or liquidation. In case
of the urban co-operative banks having multi-state presence, the
Central Registrar of Co-operative Societies, New Delhi, exercises
such powers. The banking related functions, such as issue of
license to start new banks / branches, matters relating to interest
rates, loan policies, investments, prudential exposure norms etc.
are regulated and supervised by the Reserve Bank of India under
the provisions of the Banking Regulation Act, 1949(AACS).

Main functions of commercial bnaks as well as co-
operative bank

• The borrowings, raising or taking of deposits of money.
• The lending or advancing on money either upon or without
security.
• The drawing, making, accepting, discounting, buying, selling,
collecting and dealing in bills of exchange, hundies,
promissory notes, coupons, drafts, bills of lading, railway
receipts, warrants, debentures, certificates, scripts and other

44


instruments and other instruments and securities, whether
transferable or negotiable or not.
• The granting and issuing of letter of credit, travelers cheque
and circular notes.
• The buying selling in billion and species.
• The buying and selling of foreign exchange including foreign
banks notes.
• The acquiring holding issuing of commission, underwriting
and dealing in stock, funds, shares and debentures,
debentures stocks, bonds obligations, securities and
investment of all kinds.
• The purchasing and selling of bonds and scripts or other
forms of securities on behalf of constituents or others.
• The receiving of all kinds of bonds, scripts or valuable on
deposit or for safe custody or otherwise.
• The providing of safe deposit vaults for custody of valuables
of customers and the collecting and transporting of money
and securities.

45


RELATIONSHIP BETWEEN THE COMMERCIAL
BANKS AND CO-OPERATIVE BANKS

In any type of economic system whether it is capitalism or
socialism, the banking sector is fundamentally very important. The
commercial banks, co-operative banks are the constituents of the
banking sector. Due to their support the different sectors get
strength. These banks do functioning of providing finance under
the control of the Central Bank. The functioning of commercial
banks and c0-operative banks is almost similar i.e. to accept
deposits, to provide credit facilities, to make use of cheques and
other negotiable instruments in transactions, to provide safe
deposit vault system, so the relationship between the two is close.

In India the relative progress of commercial banks in
comparison to co-operative banks is very slow. Commercial Banks
seem competing with co-operative banks. This competition is in
respect of branch expansion and facilities of credit supply.
However after nationalization, no difference is found in the working
of commercial banks. The trend to compare with co-operative
banks is changed now. Today, commercial banks do not give
much attention to bank expansion. It resulted into the growth of co-
operative banks. Co-operative credit societies have certain image
in the minds o the rural people. Co-operative banks have some
more freedom than commercial banks in their functioning.

46


DIFFERNCE BETWEEN CO-OPERATIVE BANKS
COMMERCIAL BANKS AND PUBLIC SECTOR BANKS

A.) Co-operative banks and commercial banks:

Co-operative banks have objective of fulfilling the needs of
their members, deposit holders. Especially these banks fulfill the
needs of short – term, medium - term and long – term loans. They
have social benefit outlook. On the contrary, commercial banks
have profit motivation through more and more supply of credit. Co-
operative banks do not have main objective of profit – making.
They aim at developing agriculture and other allied occupations to
agriculture. They try to provide maximum credit with minimum cost
to their members. On the other hand, loans from commercial
banks create more expenditure.

The commercial banks and co-operative banks have
difference in case of administration and management. The board
of members of co-operative banks supervises and control the day
to day working of co-operative banks. This board includes
representatives of primary committee, representatives appointed
by the government. The management of co-operative banks varies
according to organizational structure. The management is in the
hands of Board of Directors which consists of 7 to 10 members.
Out of these 2 or 3 directors are appointed by the government.
One director in the Board of Directors in case of the primary land
development bank is at appointed by the central land development
bank.

47


The management and working of commercial banks is
according to the act of nationalized banks. The working of co-
operative banks is according to the co-operative law. The
government and the members of the bank indirectly control the
working of co-operative banks.

B.) Co-operative banks and public sector banks:

The difference between the co-operative banks and public
sector banks is as follows:

1) The creation of co-operative banks is for providing credit to
industry rum on co-operative basis.

The creation of public sector banks is for providing credit to
industry and commercial trade.

2) The object of co-operative banks is not to make profit by providing
credit. The object of these banks is to promote social benefit to
maximum level.

The public sector banks do the function of credit expansion to
various sectors with the objective of accruing more and more
profit.

3) The share capital and so credit expansion of co-operative is
limited.

48


The share capital of public sector banks is unlimited and so their
credit expansion is on a large scale.

4) The banking regulation act of 1949 was not applicable to co-
operative banking upto 1966.

This act was applicable to public sector banks since beginning.

5) The government has partial control on co-operative banks.

The public sector banks are under felly control of the central
government.

6) The elected board of members of co-operative banks keeps

supervision on day to day working of these banks.

The administration and management of public sector banks is
according to the act of public sector banking.

7) There are certain limits on the branch expansion of co-operative
banks.

The public sector banks can expand their branches to any limit.

8) As the co-operative banks are partially private, they can give better
treatment to members, depositors and borrowers.

49


The public sector banks belong to the government, so the
administrative functioning of these banks is not so much
satisfactory.

50


BANKING REGULATION ACT, 1949

ORIGIN OF BANKING

Since the banking activities were started in different
periods in different countries there is no unanimous view regarding
the origin of the word ‘bank’. The word Bank is said to have
derived from the French word banco or bancus or banc or banque
which means a bench. In fact the early jews in Lombardly
transacted their banking business by sitting on benches. When
their business failed, the benches were broken and hence the
word bankrupt came into vogue.

Another common held view is that the word bank might be
original from the German word back which means a joint stock
fund. Of course a bank essentially deals with funds .In due course
it was Italiansied into banco Franchised into bank and finally
Angliesed into bank. This view is most prevalent even today.

A Banker who is doing the banking business is called a
banker. But it is not at all easy to define the term banker precisely
because a banker performs multifarious functions.

51


ORIGIN OF THE ACT

Banks are public service institution dealing with funds
of the public. Unlike joint stock companies which obtain the
required capital from the shareholders, banks obtain a very large
proportion of their working capital from the public in the form of
deposits. Hence in the national interest, there is a need to regulate
the working of banks by a separate Act.

Unfortunately in India there was no separate legislation
for Banking till 1949 and so banks were brought under the control
of the Indian Companies Act. Though the Central Banking Enquiry
Committee recommended the need for a separate legislation, it
was not given due consideration then. However subsequent
development like mushroom growth of banks with inadequate
capital, dishonest management, speculative investment,
appointment of incompetent directors for long periods with high
salaries, poor liquidity of funds etc, necessitated the passing of a
separate Act for Banking Companies. Accordingly, a bill was
introduced in March 1948 and was passed in the Parliament in
February 1949.It came into force from 16th of March 1949.This act
was originally called the Banking Companies Act 1949 and now it
is renamed as the Banking Regulation Act.

52


DEFINATION ON BANKING:-.

The business of banking has been defined in section5 (b)
of the act as follows:
“Accepting for the purpose of lending or
investment of deposit, of money from the public, repayable on
demand or otherwise, and withdraw able by cheque, draft,
order or otherwise.”

Again section 5(c) defines ‘Banking Company’ as ‘any
company which transacts the business of banking in India’.

53


Banking Regulations For Commercial Banks:-

Prohibition of trading:-
Anything contained in section 6 or in any contract, no
banking company shall directly or indirectly deal in the buying or
selling or bartering of goods, except in connection with the
realization of security given to or held by it, or engage in any trade,
or buy, sell or barter goods for others otherwise than in connection
with bills of exchange received for collection or negotiation or with
such of its business

Prohibition of employment of managing agents and
restrictions on certain forms of employment:-
No banking company Shall employ or be managed by a
managing agent or Shall employ or continue the employment of
any person

• Who is, or at any time has been, adjudicated insolvent, or
has suspended payment or has compounded with his
creditors, or who is, or has been, convicted by a criminal
court of an offence involving moral turpitude or

• Whose remuneration or part of whose remuneration takes
the form of commission or of a share in the profits of the
company.

54


Requirement as to minimum paid-up capital and
reserves:-
No banking company in existence on the commencement of
this Act, shall, after the expiry of three years from such
commencement or of such further period not exceeding one year
as the Reserve Bank, having regard to the interests of the
depositors of the company, may think fit in any particular case to
allow, carry on business and no other banking company shall after
the commencement of this Act, commence or carry on business in
India, unless it complies with such of the requirements of this
section as are applicable to it

In the case of a banking company incorporated outside India:-
(a) The aggregate value of its paid-up capital and reserves shall
not be less than fifteen lakhs of rupees and if it has a place or
places of business in the city of Bombay or Calcutta or both,
twenty lakhs of rupees.

(b) The banking company shall deposit and keep deposited with
the Reserve Bank either in cash or in the form of unencumbered
approved securities, or partly in cash and partly in the form of such
securities:-

(i) An amount which shall not be less than the minimum required.

(ii) As soon as may be after the expiration of each year, an amount
calculated at twenty per cent of its profit for that year in respect of

55


all business transacted through its branches in India, as disclosed
in the profit and loss account prepared with reference to that year.

Regulation of paid-up capital, subscribed capital and
authorised capital and voting rights of shareholders:-
No banking company shall carry on business in India, unless
it satisfies the following conditions, namely:—

(i) That the subscribed capital of the company is not less than one-
half of the authorised capital, and the paid-up capital is not less
than one-half of the subscribed capital and that, if the capital is
increased, it complies with the conditions prescribed in this clause
within such period not exceeding two years as the Reserve Bank
may allow.

(ii) That the capital of the company consists of ordinary shares
only or of ordinary shares or equity shares and such preferential
shares as may have been issued prior to the 1st day of July, 1944:

Restriction on commission, brokerage, discount, etc.
on sale of shares:-
No banking company shall pay out directly or indirectly by
way of commission, brokerage, discount or remuneration in any
form in respect of any shares issued by it, any amount exceeding
in the aggregate two and one-half per cent of the paid-up value of
the said shares.

56


Reserve Fund:-
Every banking company incorporated in India shall create a
reserve fund and shall, out of the balance of profit of each year as
disclosed in the profit and loss account prepared under section 29
and before any dividend is declared, transfer to the reserve fund a
sum equivalent to not less than twenty per cent of such profit.

The Central Government may, on the recommendation of the
Reserve Bank and having regard to the adequacy of the paid-up
capital and reserves of a banking company in relation to its deposit
liabilities, declare by order in writing that the provisions of sub-
section (1) shall not apply to the banking company for such period
as may be specified in the order.

Cash reserve:-
Every banking company, not being a scheduled bank, shall
maintain in India by way of cash reserve with itself or by way of
balance in a current account with the Reserve Bank, or by way of
net balance in current accounts or in one or more of the aforesaid
ways, a sum equivalent to at least three per cent of the total of its
demand and time liabilities in India as on the last Friday of the
second preceding fortnight and shall submit to the Reserve Bank
before the twentieth day of every month a return showing the
amount so held on alternate Fridays during a month with
particulars of its demand and time liabilities in India on such
Fridays or if any such Friday is a public holiday.

57


Restrictions on loans and advances:-
No banking company shall grant any loans or advances on
the security of its own shares, or 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, or
(iii) Any company [not being a subsidiary of the banking company
or a company registered under section 25 of the Companies Act,
1956 (1 of 1956), or a Government company] of which 61[or the
subsidiary or the holding company of which] any of the directors of
the banking company is a director, managing agent, manager,
employee or guarantor or in which he holds substantial interest, or
(iv) Any individual in respect of whom any of its directors is a
partner or guarantor.

Where any loan or advance granted by a banking company
is such that a commitment for granting it could not have been
made if had been in force on the date on which the loan or
advance was made, or is granted by a banking company after the
commencement, but in pursuance of a commitment entered into
before such commencement, steps shall be taken to recover the
amounts due to the banking company on account of the loan, or
advance together with interest, if any, due thereon within the
period stipulated at the time of the grant of the loan or advance, or
where no such period has been stipulated, before the expiry of one
year from the commencement.

58


Lending Limits
Lending limit regulations restrict the total amount of loans
and credits that a bank may extend to a single borrower. This
restriction is usually stated as a percentage of the bank's capital or
assets. For example, a national bank generally must limit its total
outstanding loans and credits to any single borrower to no more
than 15% of the bank's total capital and surplus. Some state
banking regulations also contain similar lending limits applicable to
state-chartered banks. Both federal and state laws generally allow
for a higher lending limit, up to 25% of capital and surplus for
national banks, when the portion of the credit that exceed the initial
lending limit is fully secured.

Restrictions on opening of new, and transfer of
existing, places of business:-
Without obtaining the prior permission of the Reserve Bank
no banking company shall open a new place of business in India
or change otherwise than within the same city, town or village, the
location of an existing place of business situated in India.

No banking company incorporated in India shall open a new
place of business outside India or change, otherwise than within
the same city, town or village in any country or area outside India,
the location of an existing place of business situated in that country
or area.

Before granting any permission under this section, the
Reserve Bank may require to be satisfied by an inspection or

59


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.

The Reserve Bank may grant permission to such conditions
as it may think fit to impose either generally or with reference to
any particular case.

Where, in the opinion of the Reserve Bank, a banking
company has, at any time, failed to comply with any of the
conditions imposed on it under this section, the Reserve Bank
may, by order in writing and after affording reasonable opportunity
to the banking company for showing cause against the action
proposed to be taken against it, revoke any permission granted.

Accounts and balance-sheet:-
At the expiration of each calendar year or at the expiration of
a period of twelve months ending with such date, as the Central
Government may, by notification in the Official Gazette, specify
that every banking company incorporated in India, in respect of all
business transacted by it, and every banking company
incorporated outside India, in respect of all business transacted
through its branches in India, shall prepare with reference to that
year or period, as the case may be, a balance-sheet and profit and
loss account as on the last working day of that year or the period,

60


as the case may be in the Forms set out in the Third Schedule or
as near thereto as circumstances admit.

The balance-sheet and profit and loss account shall be signed:-

(a) In the case of a banking company incorporated in India, by the
manager or the principal officer of the company and where there
are more than three directors of the company, by at least three of
those directors, or where there are not more than three directors,
by all the directors, and

(b)In the case of banking company incorporated outside India by
the manager or agent of the principal office of the company in
India.

The balance-sheet of a banking company is to be prepared
in a form other than the form set out in Part I -of Schedule VI to the
Companies Act, 1956 the requirements of that relating to the
balance-sheet and profit and loss account of a company shall, in
so far as they are not inconsistent with this Act, apply to the
balance-sheet or profit and loss account, as the case may be, of a
banking company.

The contrary contained of the Companies Act, 1956 the
period to which the profit and loss account relates shall, in the
case of a banking company, be the period ending with the last
working day of the year immediately preceding the year in which
the annual general meeting is held.

61


Power of the Reserve Bank to give directions:-
Where the Reserve Bank is satisfied that

(a) In the public interest or in the interest of banking policy.
(b) To prevent the affairs of any banking company being
conducted in a manner detrimental to the interests of the
depositors or in a manner prejudicial to the interests of the banking
company.
(c) To secure the proper management of any banking company
generally,

It is necessary to issue directions to banking companies
generally or to any banking company in particular, it may, from
time to time, issue such directions as it deems fit, and the banking
companies or the banking company, as the case may be, shall be
bound to comply with such directions.

The Reserve Bank may, on representation made to it or on
its own motion, modify or cancel any direction issued, and in so
modifying or canceling any direction may impose such conditions
as it thinks fit, subject to which the modification or cancellation
shall have effect.

62


Certain provisions of the Act not to apply to certain
banking companies:-
The provisions shall not apply to a banking company to
(a) Which, whether before or after the commencement of the
Banking Companies (Amendment) Act, 1959 has been refused a
licence, or prohibited from accepting fresh deposits by a
compromise, arrangement or scheme sanctioned by a court or by
any order made in any proceeding relating to such compromise,
arrangement or scheme, or prohibited from accepting deposits by
virtue of any alteration made in its memorandum.

(b) Whose licence has been cancelled, whether before or after the
commencement of the Banking Companies (Amendment) Act,
1959.

Where the Reserve Bank is satisfied that any such banking
company as is referred to repay, or has made adequate provision
for repaying all deposits accepted by the banking company, either
in full or to the maximum extent possible, the Reserve Bank may,
by notice published in the Official Gazette, notify that the banking
company has ceased to be a banking company within the meaning
of this Act, and thereupon all the provisions of this Act applicable
to such banking company shall cease to apply to it, except as
respects things done or omitted to be done before such notice.

63


Reimbursement to Deposit Insurance Corporation by
liquidator or transferee bank:-
Where a multi-State co-operative bank, being an insured
bank within the meaning of the Deposit Insurance and Credit
Guarantee Corporation Act, 1961, is wound up and the Deposit
Insurance Corporation has become liable to the depositors' of the
insured bank, the Deposit Insurance Corporation shall be
reimbursed by the liquidator or such other person in the
circumstances, to the extent and in the manner provided.

Punishments for certain activities in relation to
banking companies:-
No person shall
(a) Obstruct any person from lawfully entering or leaving any office
or place of business of a banking company or from carrying on any
business there, or
(b) Hold, within the office or place of business of any banking
company, any demonstration which is violent or which prevents, or
is calculated to prevent, the transaction of normal business by the
banking company, or
(c) Act in any manner calculated to undermine the confidence of
the depositors in the banking company.

Whoever contravenes any provision without any reasonable
excuse shall be punishable with imprisonment for a term which
may extend to six months, or with fine which may extend to one
thousand rupees, or with both.

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Banking Regulations for Co-operative Banks:-

Act to override bye-laws, etc:-
The provisions of this Act shall have effect, notwithstanding
anything to the contrary contained in the bye-laws of a co-
operative society, or in any agreement executed by it, or in any
resolution passed by it in general meeting, or by its Board of
Directors or other body entrusted with the management of its
affairs, whether the same be registered, executed or passed; as
the case may be before or after the commencement of the Banking
Laws.

Any provision contained in the bye-laws, agreement or
resolution aforesaid shall, to the extent to which it is repugnant to
the provisions of this Act, become or be void, as the case may be."
(i) The words, "but excluding the business of a managing agent or
secretary and treasurer of company" shall be omitted;
(ii) After the word "company", the words "co-operative society"
shall be inserted;
(iii) After the word "company", the words "or co-operative society"
shall be inserted

Use of words "bank", "banker" or "banking" :-
No co-operative society other than a co-operative bank shall
use as part of its name or in connection with its business any of
the words "bank", "banker" or "banking", and no co-operative
society shall carry on the business of banking in India unless it
uses as part of its name at least of such words.
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Nothing in this section apply to:-
(a) A primary credit society, or
(b) A co-operative society formed for the protection of the mutual
interest of co-operative banks or co-operative land mortgage
banks, or
(c) Any co-operative society, not being a primary credit society,
formed by the employees of
(i) A banking company or the State Bank of India or a
corresponding new bank or a subsidiary bank of such banking
company, State Bank of India or a corresponding new bank, or
(ii) A co-operative bank or a primary credit society or a co-
operative land mortgage bank, insofar as the word "bank",
"banker" or "banking" appears as part of the name of the employer
bank, or as the case may be, of the bank whose subsidiary the
employer bank is."

Requirement as to minimum paid-up capital and
reserves:-
Any law relating to co-operative societies for the time being
in force, no co-operative bank shall commence or carry on the
business of banking in India unless the aggregate value of its paid-
up capital and reserves is not less than one lakh of rupees.
(a) Any such bank which is carrying on such business at the
commencement of the Banking Laws (Application to Co-operative
Societies) Act, 1965 for a period of three years from such
commencement.

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(b) To a primary credit society which becomes a primary co-
operative bank after such commencement, for a period of two
years from the date it so becomes a primary co-operative bank or
for such further period not exceeding one year, the Reserve Bank,
having regard to the interests of the depositors of the primary co-
operative bank, may think fit in any particular case to allow.

For the purpose of this section, "value" means the real or
exchangeable value and not the nominal value which may be
shown in the books of the co-operative bank concerned.

If any dispute arises in computing the aggregate value of the
paid-up capital and reserves of any co-operative bank, a
determination thereof by the Reserve Bank shall be final for the
purposes of this section.

Cash reserve:-
Every co-operative bank, not being a State cooperative bank
for the time being included in the Second Schedule to the Reserve
Bank of India Act, 1934 (hereinafter referred to as a "scheduled
State Co-operative Bank"), shall maintain in India by way of cash
reserve with itself or by way of balance in a current account with
the Reserve Bank or the State co-operative bank of the State
concerned or by way of net balance in current accounts, or, in the
case of a primary co-operative bank, with the central cooperative
bank of the district concerned, or in one or more of the aforesaid
ways, a sum equivalent to at least three per cent of the total of its
demand and time liabilities in India, as on the last Friday of the

67


second preceding fortnight and shall submit to the Reserve Bank
before the fifteenth day of every month a return showing the
amount so held on alternate Fridays during a month with
particulars of its demand and time liabilities in India on such
Fridays or if any such Friday is a public holiday under the
Negotiable Instruments Act.

Restriction on holding shares in other co-operative
societies:-
No co-operative bank shall hold shares in any other co-
operative society except to such extent and subject to such
conditions as the Reserve Bank may specify in that behalf.
(i) Shares acquired through funds provided by the State
Government for that purpose;
(ii) In the case of a Central co-operative bank, the holding of
shares in the State co-operative bank to which it is affiliated;
(iii) In the case of a primary co-operative bank, the holding of
shares in the Central co-operative bank to which it is affiliated or in
the State cooperative bank of the State in which it is registered

Restrictions on loans and advances:-
No co-operative bank shall:-
(a) Make any loans or advances on the security of its own shares.
(b) Grant unsecured loans or advances
(i) To any of its directors.
(ii) To firms or private companies in which any of its directors is
interested as partner of managing agent or guarantor or to
individuals in cases where any of its directors is a guarantor; or
68


(iii) To any company in which the chairman of the Board of
directors of the co-operative bank (where the appointment of a
chairman is for a fixed term) is interested as its managing agent, or
where there is no managing agent, as its chairman or managing
director.

Accounts and Balance Sheet:-
At the expiration of each year ending with the 30th days of
June, or at the expiration of a period of twelve months ending with
such date as the Central Government may, by notification in the
Official Gazette, specify in this behalf every co-operative bank, in
respect of all business transacted by it, shall prepare with
reference to that year or the period a balance sheet and profit and
loss account as on the last working day of the year or the period in
the Forms set out in the Third Schedule as near there to as
circumstances admit:

Reimbursement to the Deposit Insurance Corporation
by liquidator or transferee bank:-
Where a multi-State co-operative bank, being an insured
bank within the meaning of the Deposit Insurance and Credit
Guarantee Corporation Act, 1961, is wound up and the Deposit
Insurance Corporation has become liable to the depositors of the
insured bank, the Deposit Insurance Corporation shall be
reimbursed by the liquidator or such other person in the
circumstances, to the extent and in the manner.

69


Order of winding up multi-State co-operative bank to
be final in certain cases:-
Where a multi-State co-operative bank, being an eligible
cooperative bank, has been registered under the Deposit
Insurance and Credit Guarantee Corporation Act, 1961 as an
insured bank, and subsequently –

(a) In pursuance of a scheme prepared with the previous approval
of the Reserve Bank under section 18 of the Multi-State Co-
operative Societies Act, 2002, an order sanctioning a scheme of
compromise and arrangement or reorganization or reconstruction
has been made.

(b) On requisition by the Reserve Bank, an order for winding up of
the multi-State co-operative bank has been made under of Multi-
State Co-operative Societies Act, 2002.

(c) An order for the super session of the Board and the
appointment of an Administrator therefore has been made for
sanctioning the scheme of compromise and arrangement or
reorganisation or reconstruction or the winding up of the multi-
State co-operative bank under clause or an order for the super
session of the Board and the appointment of an Administrator or
shall not be liable to be called in question in any manner.

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Validation of licenses granted by Reserve Bank to
multi state co-operative societies:-
(a) No licence, granted to a multi-State co-operative society by the
Reserve Bank, which was subsisting on the date of
commencement of the Banking Regulation (Amendment) and
Miscellaneous Provisions Act, 2004, shall be invalid or be deemed
ever to have been invalid merely by the reason of such judgment,
decree or order

(b) Every licence, granted to a multi-State co-operative society by
the Reserve Bank, which was subsisting on the date of
commencement of the Banking Regulation (Amendment) and
Miscellaneous Provisions Act, 2004, shall be valid and be deemed
always to have been validly granted in accordance with law

(c) A multi-State co-operative society whose application for grant
of licence for carrying on banking business was pending with the
Reserve Bank on the date of commencement of the Banking
Regulation (Amendment) and Miscellaneous Provisions Act, 2004
shall be eligible to carry on banking business until it is granted a
licence in pursuance or by a notice in writing notified by the
Reserve Bank that the licence cannot be granted to it"

71


Power to exempt:-
Without prejudice to the provisions of, the Reserve Bank
may, by notification in the Official Gazette, declare that, for such
period and subject to such conditions as may be specified in such
notification the whole or any part of the provisions, as may be
specified therein, shall not apply to any co-operative bank or class
of co-operative banks, with reference to all or any of the offices of
such co-operative bank or banks, or with reference to the whole or
any part of the assets and liabilities of such co-operative bank or
banks."

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CONCLUSION

The reserve bank of India is India‘s central bank. Reserve bank is
a regulation of banks but is also the dominant owner of the largest
commercial banks. With globalization and impact of technology,
several new challenges are likely to emerge for the fraternity of
central banks. The RBI has blamed the commercial banks,
charging them with negligence and extensive, violation of banking
of banking regulation. The commercial banks are in turn blaming
the RBI for inefficient functioning and ineffective supervision. The
banking system has three tiers. These are the scheduled
commercial banks, the regional rural banks which operate in rural
areas not covered by the scheduled banks and the co-operative
banks and special purpose rural banks. The RBI lays down
restriction on bank lending and other activities with large
companies. These restriction known as consortium guidelines
seem to have outlined their usefulness. All commercial banks face
stiff competition and restrictions on the use of both their assets and
liabilities. 40% of loans must be directed to priority sector and high
liquidity ratio and cash reserve requirements severely limit the
availability of deposits for lending. The co-operative banking
system has witnessed phenomenal growth during the last one and
half decades. The role of RBI thus is to frame a regulatory and
supervisory regime that is multi – layered to capture the
heterogeneity of the sector and implement policies that would
provide adequate elbowroom for the sector to grow in a non –
disruptive manner. Despite the importance of co-operative banks
in the Indian economy, of late there has been a huge debate

73


concerning the regulation of these banks. These concerns have
been trigged by a spate of failures that have been attributed to
mismanagement and frauds. This takes us to the central question
of what are the problems that plague this sector and what could be
the possible remedies. Commercial banks remain the key players.
More ever the central bank is most developing countries is
relatively well placed for funding, is a centre of technical
excellence and can maintain greater independence from the
lobbying of commercial and political interests on behalf of certain
favoured institutions.

RECOMMENDATIONS / SUGGESTIONS
74


The role of the bank as regulator of banking sector is mainly
by virtue of the provisions of the Banking Regulation Act, 1949.

As provided in Section 6 of the banking regulation act, banks
may undertake certain non – banking business in addition to the
business of banking. In that regard banks be subject to the
regulatory control of other agencies also.

Being in the business of banking, cooperative credit
societies, including the State- and district-level cooperative banks,
have to follow the principles of banking in their functioning. The
present structure of the State Cooperative Societies Act with the e
Registrar at its head, presiding over the destiny of the
cooperatives, is totally unsuitable for the cooperatives to operate
on sound prudential banking norms. The banking institutions being
governed by such archaic rules and regulations is an anachronism
in the present climate of economic liberalisation.

It is necessary that bank-related functions of the cooperative
banks be brought full under the purview of Banking Regulation Act,
1949 in line with the existing provisions of the BR Act as applicable
to banking companies -- commercial banks registered under the
Companies Act. The provisions of the BR Act should override the
provisions of the State Acts/bye-laws/rules which run counter to it.
This will lead to a clear demarcation of the a activities of
cooperative banks which fall under the domain of RBI vis-à-vis the
RCS.'

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