Laws and Regulations related to Banking Sector: formula sheet

Key formulas

Establishment (RBI Act, Section 3)

Body corporate + perpetual succession + common seal + can sue and be sued

Purpose: take over management of currency from the Central Government and carry on banking business.

Composition of Central Board (Section 8(1))

Governor + not more than 4 Deputy Governors + 4 Local Board directors + 10 other nominated directors + 1 Government official

All appointed or nominated by the Central Government. Four Local Board directors are one from each of the four Local Boards under Section 9.

Governor and Deputy Governors: term and duty

Whole time; term ≤ 5 years; eligible for re-appointment

Salary and allowances are fixed by the Central Board with Central Government approval. Part-time honorary work is allowed only in the public interest at the request of the Central or a State Government, if it will not interfere with their duties.

Nominated directors under clause (c)

Term = 4 years; maximum 2 terms = 8 years (continuous or intermittent)

Applies to the ten directors under Section 8(1)(c) only.

Government official under clause (d)

Holds office during the pleasure of the Central Government

May attend meetings and take part in deliberations but cannot vote.

Voting at Central Board (Section 8(3))

Deputy Governor and clause (d) official: attend, deliberate, no vote

Exception: if the Governor cannot attend, a Deputy Governor authorised by him in writing may vote for him at that meeting.

Validity of board acts (Section 8(5))

Vacancy or defect in constitution does not invalidate board's act

No act or proceeding of the Board can be questioned merely on this ground.

RBI powers under Banking Regulation Act, Section 36(1)(d)

Written order, if satisfied of public interest, banking policy, or need to prevent affairs being detrimental to the bank or depositors

Orders can require a directors' meeting, depute observers, require notices of meetings, appoint officers to observe the bank's conduct, or require changes in management.

Suspension of Banking Regulation Act (Section 4)

Central Government: ≤ 60 days. Governor in emergency: ≤ 30 days. Total with extensions: ≤ 1 year

Government acts on RBI's representation. Extensions are up to 60 days at a time by notification, and notifications are laid before Parliament.

MPC composition (section 45ZB(2))

Governor (Chair) + Deputy Governor (Monetary Policy) + 1 RBI officer + 3 Central Government appointees = 6 members

The first three are ex officio members. The three outside members are appointed by the Central Government.

MPC function and effect (section 45ZB(3) and (4))

MPC determines the Policy Rate to achieve the inflation target; its decision binds the RBI

The Central Government constitutes the MPC by Gazette notification.

Repo

Repo = borrowing funds by selling securities with an agreement to repurchase at an agreed price including interest

Section 45U(c). From the bank's side, repo is borrowing from the RBI.

Reverse repo

Reverse repo = lending funds by purchasing securities with an agreement to resell at an agreed price including interest

Section 45U(d). From the bank's side, it is lending to the RBI.

CRR amount

CRR amount = CRR % × Net Demand and Time Liabilities (NDTL)

Held as cash with the RBI. Use the rate given in the question.

SLR amount

SLR amount = SLR % × NDTL

Held by the bank itself in liquid assets. Use the rate given in the question.

Directions to NBFCs (section 45JA)

RBI may direct NBFCs on income recognition, accounting standards, provisioning, capital adequacy, deployment of funds

NBFCs are bound to follow the policy and directions.

Registration (section 45-IA)

No NBFC may carry on business without (RBI certificate of registration + required net owned fund)

The RBI specifies the net owned fund amount from time to time. The Act does not fix a figure, so do not quote one without a source.

Reserve fund (section 45-IC)

Minimum transfer = 20% × net profit of the year

Transfer is made out of the profit disclosed in the profit and loss account, before any dividend is declared. Appropriation from the fund only for purposes the RBI specifies, and each such appropriation must be reported to the RBI within 21 days.

Liquid assets (section 45-IB)

Unencumbered approved securities ≥ prescribed % of deposits (not less than 15%)

Applies to NBFCs that accept deposits. The RBI prescribes the exact percentage.

Principal business test

Financial assets > 50% of total assets and financial income > 50% of gross income

This is the RBI's regulatory test, not a text of Chapter IIIB. Use it when the question asks whether a company is an NBFC.

RBI powers over NBFCs

Directions + collection of information + inspection + prohibition of deposit acceptance

Includes policy and direction powers, information powers (section 45-K), the power to prohibit deposit acceptance and alienation of assets (section 45-MB) and inspection (section 45-N).

Bank moratorium (Banking Regulation Act, section 45)

Total moratorium period ≤ 6 months

Applies to a banking company, on RBI's application to the Central Government. Use it only to contrast banks with NBFCs.

Information power

Section 45NAA(1): RBI directs NBFC → NBFC annexes to its financial statements or furnishes separately statements and information on any group company

The RBI may do this at any time and fixes the time and intervals. The direction is addressed to the NBFC.

Inspection and audit power

Section 45NAA(2): RBI may at any time inspect or audit any group company of an NBFC and its books of account

Applies notwithstanding anything to the contrary in the Companies Act, 2013.

Meaning of group company

Two or more entities related by: subsidiary-parent | joint venture | associate | promoter-promotee | related party | common brand name | equity investment of 20% and above

Subsidiary-parent, joint venture and associate are as notified by the RBI in accordance with Accounting Standards. Common brand name means use of a registered brand name of an entity by another entity for business purposes.

Purpose test

Information the RBI considers necessary or expedient for the purposes of the Act

This is the standard for the information direction in sub-section (1).

Company offence (RBI Act s.58C(1))

Liable = company + every person in charge of and responsible for business at the time of default

Defence: default without his knowledge, or all due diligence exercised. The burden is on the person to prove it.

Consent, connivance or neglect (RBI Act s.58C(2))

Offence by company + consent / connivance / neglect of director, manager, secretary, officer or employee = that person also guilty

Applies notwithstanding sub-section (1). The due-diligence proviso is in sub-section (1).

Meaning of company for s.58C

Company = any body corporate, including corporation, non-banking institution, firm, co-operative society, association of individuals

Director of a firm means a partner.

Place of offence

Deemed place = registered office or principal place of business in India

From Explanation 1 to s.58C.

Omitted provisions

RBI Act s.45G omitted w.e.f. 13-12-1974; SARFAESI s.28 omitted w.e.f. 1-9-2016; SARFAESI s.27 deemed omitted

Do not quote penalties from these as current law.

SARFAESI s.27 old fine

Fine up to ₹5,000 per day of continuing default

Historical because of the proviso on deemed omission.

Good faith protection (SARFAESI s.32)

No suit, prosecution or legal proceedings against the Reserve Bank, Central Registry, secured creditor or its officers for acts done or omitted in good faith under the Act

Protection depends on good faith.

BR Act s.45J

High Court may try summarily offences by promoters, directors, managers or officers of a banking company being wound up

Offence must be punishable under the BR Act or the Companies Act, 1956.

Quick revision

• Section 21, Banking Regulation Act: RBI may determine advances policy for banks if satisfied it is necessary or expedient in the public interest, in the interests of depositors or for banking policy.
• Banking companies are bound to comply with directions given under Section 21.
• Section 21(2) directions cover purpose of advances, margins, per-borrower maximum, guarantee limits, and interest rate and terms.
• Section 45JA, RBI Act: RBI may determine policy and give directions to NBFCs, and they are bound to follow them.
• Section 45JA topics include income recognition, accounting standards, provisioning, capital adequacy and deployment of funds.
• Section 45NC: RBI may exempt NBFCs or classes of them from the Chapter by Gazette notification, on conditions it thinks fit.
• Section 45NAA(1): RBI may direct an NBFC to annex or furnish statements and information about any group company.
• Section 45NAA(2): RBI may inspect or audit a group company and its books, despite the Companies Act, 2013.
• Group company relationships include subsidiary-parent, joint venture, associate, promoter-promotee, related party, common brand name and equity investment of twenty per cent and above.
• Section 58: the Central Board makes regulations with Central Government's previous sanction, and they are laid before Parliament for thirty days.
• Section 45N, Banking Regulation Act: appeal from High Court in a civil proceeding if the subject-matter exceeds five thousand rupees.

Common mistakes

• Saying a Deputy Governor can never vote at the Central Board. Fix: Remember the exception: a Deputy Governor authorised in writing by the Governor may vote for him when he is unable to attend.
• Applying the eight-year limit to the Governor and Deputy Governors. Fix: The four-year term and eight-year cap apply to the clause (c) nominated directors. The Governor and Deputy Governors have a term of up to five years set by the Central Government, with re-appointment allowed.
• Saying the RBI appoints the three external MPC members. Fix: Remember that the Central Government appoints the three external members and constitutes the MPC by notification.
• Reversing repo and reverse repo. Fix: Use the Act's definitions: repo is borrowing by selling securities; reverse repo is lending by purchasing securities. Always state whose view you take.
• Quoting a fixed net owned fund amount as if the Act prescribes it. Fix: Write that the NBFC must hold the net owned fund the RBI specifies. Give a figure only if the question supplies it.
• Applying the reserve fund percentage to dividends or to total reserves instead of net profit. Fix: Take the net profit of the year as shown in the profit and loss account and multiply by 20% as the minimum transfer.
• Saying the RBI directs the group company to furnish information under sub-section (1). Fix: Remember the direction is to the NBFC, which annexes or furnishes the group company information.
• Thinking the Companies Act, 2013 can block inspection of a group company. Fix: Recall that the power applies notwithstanding anything to the contrary in the Companies Act, 2013.
• Treating every director as automatically liable for a company's default. Fix: Under s.58C(1), only persons in charge and responsible are covered, and they can prove lack of knowledge or due diligence.
• Quoting penalties from RBI Act s.45G as current law. Fix: Section 45G was omitted w.e.f. 13-12-1974. Answer that no penalty applies under it.

Exam tips

• Learn the numbers as a small table in your notes: not more than 4 Deputy Governors, 4 Local Board directors, 10 nominated directors, 1 Government official, 5 years, 4 years, 8 years, 30 days, 60 days, 1 year.
• For MCQs, watch for the word who. Almost every appointment under the RBI Act is made by the Central Government.
• In descriptive answers, write the rule first, then the exception, then a one-line conclusion. This earns marks for application, not recall.
• Keep section numbers to those you are sure of: Section 3 and Section 8 of the RBI Act, and Sections 4 and 36 of the Banking Regulation Act.
• Read case scenario MCQs twice for dates and durations, then count terms or days before choosing an option.
• Learn section 45ZB word by word: composition, function and binding effect are favourite MCQ points.
• For repo and reverse repo, quote the section 45U definitions. Both involve securities and an agreed repurchase or resale price including interest.
• In numericals, compute CRR and SLR separately on the same NDTL base and use only the rates given.