CS Professional · Banking and Insurance - Laws and Practice

Banking Operations: formula sheet

Full chapter guide

Key formulas

Licence requirement (S.22(1)): No licence from RBI = no banking business in India; Licence may carry conditions RBI thinks fit to impose.
Application (S.22(2)): Apply in writing to RBI before commencing banking business; Existing companies at commencement of the Act had six months from commencement to apply.
Grant tests (S.22(3)): (a) pay depositors in full as claims accrue; (b) affairs not detrimental to depositors; (c) management not prejudicial; (d) adequate capital structure and earning prospects; (e) public interest served; (f) no prejudice to the banking system, monetary stability and growth; (g) any other condition RBI considers necessary; RBI 'may require to be satisfied' by inspection of books or otherwise.
Foreign company (S.22(3A)): S.22(3) conditions + public interest + no discrimination against Indian banks + compliance with the Act; Applies to a company incorporated outside India.
Cancellation grounds (S.22(4)): (i) ceases banking business in India; (ii) breaches licence conditions; (iii) any S.22(3)/(3A) condition not fulfilled; For (ii) and (iii), RBI normally gives a chance to comply first.
Appeal (S.22(5)-(6)): Appeal to Central Government within 30 days of communication of cancellation; Decision of the Central Government, or of RBI if no appeal, is final.
Licence requirement: No banking business in India without an RBI licence (Section 22(1)); The RBI may impose conditions on the licence as it thinks fit.
Section 22(3)(a): Company is or will be able to pay present or future depositors in full as their claims accrue; Depositor-payment test.
Section 22(3)(b): Affairs not being, or not likely to be, conducted in a manner detrimental to present or future depositors; Depositor-interest test.
Section 22(3)(c): General character of proposed management not prejudicial to public interest or depositors' interest; Looks at proposed management.
Section 22(3)(d): Adequate capital structure and earning prospects; Both capital structure and earning prospects must be adequate.
Section 22(3)(e): Public interest will be served by the grant of licence; Positive public-interest test.
Section 22(3)(f): Grant not prejudicial to operation and consolidation of the banking system consistent with monetary stability and economic growth; Considers banking facilities in the proposed principal area, potential scope for expansion of existing banks and other relevant factors.
Section 22(3)(g): Any other condition the RBI considers necessary so that banking is not prejudicial to public interest or depositors; Residual condition based on the RBI's opinion.
Section 22(3A): Foreign company: Section 22(3) conditions + public interest + no discrimination against Indian banking companies + compliance with the Act; Applies to companies incorporated outside India.
Licence requirement: No banking business in India without an RBI licence – Section 22(1); The RBI may impose conditions when it issues the licence.
Grounds for cancellation: Section 22(4): (i) ceases banking business in India; (ii) fails to comply with a sub-section (1) condition; (iii) a sub-section (3) or (3A) condition is not fulfilled; Three grounds only. Learn them as: stopped, breached, no longer fit.
Opportunity to comply (proviso): Applies to grounds (ii) and (iii). Not required if the RBI opines delay will prejudice depositors or the public; Not applicable to ground (i), ceasing business.
Appeal: Appeal to the Central Government within 30 days from communication of the decision – Section 22(5); Time runs from the date the decision is communicated, not the date it is passed.
Finality: Section 22(6): Central Government's decision on appeal is final; if no appeal, the RBI's decision is final; The Act itself makes the decision final.
General rule, Section 23(1)(a): New place of business in India OR change of location (not within same city/town/village) = prior RBI permission; Applies to every banking company. Permission must be taken before the act, not after.
Overseas places, Section 23(1)(b): Indian-incorporated bank + new place of business outside India = prior RBI permission; A shift within the same city, town or village in that country or area is exempt.
Temporary place proviso: Temporary place ≤ 1 month + within city/town/village (or environs) where bank already has a place + for an exhibition, conference, mela or like occasion = no permission; All conditions must be met. The bank must already have a place of business there.
RBI's satisfaction, Section 23(2): Financial condition and history + character of management + capital structure and earning prospects + public interest; RBI may require satisfaction by inspection under Section 35 or otherwise.
Conditions and revocation, Section 23(3) and (4): Permission may carry conditions; on failure to comply, RBI may revoke by written order after reasonable opportunity to show cause; Revocation needs a written order and a show-cause opportunity.
Regional rural banks, Section 23(4A): RRB applies through NABARD, with an advance copy sent directly to RBI; NABARD gives comments on merits and forwards the application to RBI.
Place of business, Section 23(5): Includes sub-office, pay office, sub-pay office, and any place where deposits are received, cheques cashed or moneys lent; Wide definition. It is not limited to full branches.

Quick revision

Section 22(1): no company may carry on banking business in India without an RBI licence; RBI may attach conditions.
A company must apply to RBI in writing before commencing banking business in India (Section 22(2)).
Section 22(3) conditions include ability to pay depositors in full, and affairs not conducted against depositors' interests.
Other Section 22(3) tests: management character, adequate capital structure and earning prospects, and public interest.
RBI also considers banking facilities in the area and the effect on the banking system, monetary stability and economic growth.
Clause (g) is a residual condition: anything else RBI considers necessary for public interest and depositors.
Section 22(3A) adds tests for foreign companies, including no discrimination against Indian banking companies.
RBI may cancel a licence if the company stops banking in India, breaches licence conditions, or fails a Section 22(3) or (3A) condition.
Before cancelling for breach or failed conditions, RBI normally gives a chance to comply, unless delay would harm depositors or the public.
Appeal against cancellation goes to the Central Government within 30 days of communication of the decision; that decision is final.
Section 23: prior RBI permission is needed to open a new place of business or change its location, except within the same city, town or village.
A temporary place of business for up to one month at an exhibition, conference or mela does not need permission, if the bank already has a place of business there.

Common mistakes

Saying RBI must always inspect the books before granting a licence. Fix: The Act says RBI 'may require to be satisfied' by inspection of books or otherwise. It is discretionary.
Writing that an appeal against cancellation goes to the High Court or RBI. Fix: Section 22(5) provides an appeal to the Central Government within thirty days of the decision being communicated.
Saying the RBI must grant a licence once the company applies. Fix: Write that the RBI may require to be satisfied on the Section 22(3) conditions before it grants the licence.
Listing only capital and depositor payment and leaving out management, public interest and banking system impact. Fix: Learn all seven as labels (a) to (g) and write them in order.
Saying the appeal goes to the RBI Governor, a High Court or the Supreme Court. Fix: Section 22(5) names only the Central Government as appellate authority.
Counting the thirty days from the date of the RBI's decision. Fix: The Act says thirty days from the date on which the decision is communicated to the company.
Treating the Section 22 licence as enough to open any branch. Fix: State that Section 22 allows banking business, while Section 23 separately controls places of business. Both are needed.
Saying permission is needed for every shift of a branch. Fix: Check the location first. A move within the same city, town or village needs no permission under Section 23(1).

Exam tips

Write the rule, then apply it to the facts, then conclude. Do not just list the section.
Quote the key phrases: 'conditions as the Reserve Bank may think fit' and 'opportunity of taking the necessary steps'.
Cite sub-section numbers: 22(1) licence, 22(3) conditions, 22(3A) foreign, 22(4) cancel, 22(5) appeal.
In case questions, link each fact to a specific condition clause and say which one it breaches.
Always end with the practical step: apply in writing, comply within the time given, or appeal within thirty days.
Write the section number 22(3) and the clause letters (a) to (g); examiners look for the full list.
In case studies, name the condition that each fact touches before giving the conclusion.
Use the phrase "may require to be satisfied" to show you know the RBI's power is based on its satisfaction.