Overview of Indian Banking System: formula sheet

Key formulas

Legal status of RBI (s.3)

RBI = body corporate + perpetual succession + common seal; sues and is sued by its name

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

Local Boards (s.9)

4 areas (First Schedule); 5 members each; appointed by Central Government; chairman elected by the members

Members represent territorial and economic interests and the interests of co-operative and indigenous banks.

Term of Local Board member (s.9(3))

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

Eligible for reappointment, but not beyond two terms.

Role of Local Board (s.9(4))

Advise the Central Board on matters referred + perform delegated duties

It advises. It does not run the Bank.

Central Board regulations (s.58)

Regulations = Central Board + previous sanction of Central Government + notification in Official Gazette

Must be consistent with the Act. They are laid before Parliament for a total of thirty days, and Parliament may modify or annul them without affecting past actions. Copies are available to the public on payment.

Matters for regulations (s.58(2))

Board procedure; Local Boards; delegation; committees; staff funds; contracts; seal; accounts; clearing-houses; electronic fund transfer; relations with scheduled banks

Clause (r) covers 'generally, for the efficient conduct of the business of the Bank'.

RBI powers over banking companies (BR Act s.36(1))

Caution/prohibit and advise; assist in amalgamation on request; give loan assistance; issue written orders (meetings, observers, reports, management changes)

Orders under clause (d) need satisfaction of public interest, banking policy, or preventing affairs being conducted detrimentally to the bank or its depositors.

Licence requirement

No company may carry on banking business in India without an RBI licence (section 22(1))

The licence may be issued subject to conditions the RBI thinks fit.

Application for licence

Every other company must apply in writing to the RBI before commencing banking business (section 22(2))

Companies existing at commencement of the Act had six months to apply.

Conditions the RBI may check

Section 22(3)(a) to (g): pay depositors in full; affairs not detrimental to depositors; management not prejudicial to public interest; adequate capital and earning prospects; public interest served; no prejudice to banking system and monetary stability; any other condition the RBI considers necessary

The RBI may require satisfaction by inspection of books or otherwise.

Foreign companies

Section 22(3A): the section 22(3) conditions, plus public interest, no discrimination against Indian banking companies by the home country, and compliance with the Act

Applies to a company incorporated outside India.

Cancellation of licence

Section 22(4): RBI may cancel if the company (i) ceases banking business in India, (ii) fails to comply with licence conditions, or (iii) fails any section 22(3)/(3A) condition

For (ii) and (iii), the RBI must normally give an opportunity to comply first, unless delay would prejudice depositors or the public.

Appeal

Appeal to the Central Government within thirty days of communication of cancellation (section 22(5))

The decision of the Central Government, or of the RBI if no appeal, is final (section 22(6)).

Permitted business

Banking business plus section 6(1)(a) to (o); nothing else (section 6(2))

The list is exhaustive, but clause (o) allows additions by Central Government notification.

Section 46A: public servant status

Whole-time chairman, MD, director, auditor, liquidator, manager and any other employee of a banking company = public servant for Chapter IX of the IPC

The word 'whole-time' qualifies the chairman only. A part-time chairman is not within the opening words of the section as it stands.

Section 10B(1) and (1A): chairman

Chairman: whole-time or part-time. Whole-time: manages whole affairs. Part-time: prior RBI approval, and an MD manages whole affairs

The chairman or MD acts subject to the superintendence, control and direction of the Board.

Section 10B(2): tenure

Whole-time chairman or MD: whole-time employment, term fixed by Board, not more than 5 years, eligible for re-election or re-appointment

The Board fixes the period. The Act sets only the ceiling.

Section 10B(4): qualification and disqualification

Special knowledge and practical experience of banking or financial, economic or business administration; disqualified if in other business or vocation, with listed exceptions

A chairman may be a director of a subsidiary of the bank or of a section 25 company of the 1956 Act.

Section 10B(6) and (7): RBI removal

Hearing, then order to replace; if not replaced within 2 months, RBI removes and appoints; appeal to Central Government within 30 days

The RBI order is otherwise final and cannot be questioned in any court.

Section 10B(5A) and (9): continuity

Outgoing chairman or MD continues until successor assumes office, with RBI approval; stop-gap arrangements for total period not exceeding 4 months, with RBI approval

Section 10B(9) applies on death, resignation, incapacity or leave not involving vacation of office.

Section 45-ID, RBI Act (NBFC contrast)

RBI may remove an NBFC director by reasoned written order after reasonable opportunity; bar up to 5 years at a time; replacement director up to 3 years at a time; no compensation

This applies to NBFCs other than Government owned ones. It is not part of the banking company provisions.

Registration and NOF requirement (s. 45-IA(1))

No NBFC may carry on business without: (a) certificate of registration + (b) NOF of ₹25 lakh or notified amount (maximum ₹100 crore)

The RBI may notify different NOF amounts for different categories of NBFCs.

Net owned fund (Explanation I to s. 45-IA)

NOF = (paid-up equity capital + free reserves) − (accumulated loss + deferred revenue expenditure + other intangible assets) − (investments in shares of subsidiaries, same-group companies and other NBFCs) − (excess of book value of debentures, bonds, loans, advances and deposits with subsidiaries and same-group companies over 10% of the first figure)

The 10% limit is on figure (a) in the text. Figure (a) is paid-up equity capital plus free reserves, after deducting only accumulated loss, deferred revenue expenditure and intangible assets. It is not the figure after the share-investment deduction. Only the excess over 10% of (a) is deducted.

Conditions for registration (s. 45-IA(4))

Pay depositors in full; affairs not detrimental to depositors; management not prejudicial; adequate capital structure and earning prospects; public interest; no prejudice to financial sector consolidation and monetary stability; any other condition

The RBI may satisfy itself by inspecting the books or otherwise.

Appeal (s. 45-IA(7))

Appeal to the Central Government within 30 days of communication of rejection or cancellation

The decision of the Central Government, or of the RBI if no appeal is made, is final. A hearing is required before rejecting an appeal.

Resolution schemes (s. 45MBA)

Amalgamation | Reconstruction | Splitting into units with Bridge Institutions

Trigger: public interest or financial stability, after inspection of books, to continue activities critical to the financial system.

Management consequences under s. 45MBA(2) and (3)

Pay cut + cancellation of shares of senior management or relatives + sale of assets; no compensation for pay cut or cancelled shares

Applies to CEO, MD, chairman or senior management and, for shares, their relatives.

Quick revision

• No company may carry on banking business in India without an RBI licence (Section 22, Banking Regulation Act).
• A company applies in writing to the RBI for a licence before commencing banking business.
• The RBI may inspect books or use other means to check licensing conditions before granting a licence.
• Licensing conditions include ability to pay depositors in full, management not prejudicial to public interest, adequate capital structure and earning prospects, and public interest.
• A foreign-incorporated company must also meet the Section 22(3A) conditions, including non-discrimination against Indian banks.
• The RBI may cancel a licence if the company stops banking business in India, breaks licence conditions or fails a licensing condition.
• Before cancelling for breach, the RBI normally gives a chance to comply, unless delay would harm depositors or the public.
• A bank aggrieved by cancellation may appeal to the Central Government within thirty days of communication.
• The decision of the Central Government on appeal, or of the RBI where no appeal is made, is final.
• Under Section 45MBA of the RBI Act, the RBI may frame schemes for an NBFC for amalgamation, reconstruction or splitting, including Bridge Institutions.
• Such a scheme may reduce senior management pay, cancel their shares or sell assets, and those affected get no compensation.

Common mistakes

• Treating the RBI as a department of the Government. Fix: Write that the RBI is a body corporate with perpetual succession and a common seal, which sues and is sued in its own name.
• Saying Local Board members can be reappointed any number of times. Fix: State: a four-year term, and no more than two terms, a maximum of eight years, whether continuous or intermittent.
• Saying a bank may do any lawful business. Fix: Quote section 6(2): no banking company shall engage in any business other than those in section 6(1).
• Treating the section 6(1) list as only banking business. Fix: Section 6(1) says 'in addition to the business of banking'. The list is the other permitted forms of business.
• Saying every chairman is a public servant under section 46A. Fix: Remember that the section now says every chairman appointed on a whole-time basis. A part-time chairman is not covered by those words.
• Treating the public servant status as applying for all purposes. Fix: Write that the persons are deemed public servants for the purposes of Chapter IX of the Indian Penal Code only.
• Saying an NBFC needs a banking licence under section 22 of the Banking Regulation Act. Fix: An NBFC needs a certificate of registration under section 45-IA of the RBI Act, not a bank licence.
• Stating the NOF as fixed at ₹25 lakh always. Fix: Say ₹25 lakh or such other amount, not exceeding ₹100 crore, as the RBI notifies, possibly different for different categories.

Exam tips

• Learn section 3, section 9 and section 58 of the RBI Act and section 36 of the Banking Regulation Act by content. These are the sections the official text supports directly.
• Write the exact figures for Local Boards: four areas, five members, four-year term, two terms, eight years.
• In case questions, always name the authority that appoints (the Central Government) and the authority that manages (the Central Board).
• When listing functions, group them: issuer of currency, banker to government, banker to banks, regulator and supervisor, and monetary and foreign exchange manager. Give one line of explanation for each.
• Add one practical compliance point to every answer, such as board resolution, filing, or compliance with an RBI order.
• Write the section number with every rule: section 6(1), 6(2), 22(1) to 22(6). It earns marks for precision.
• Keep the clause list short and grouped by theme, then give two or three exact clauses you are sure of, such as (e) guarantee and indemnity and (o) notified business.
• For licence questions, structure the answer in this order: need for licence, application, RBI checks, cancellation grounds, appeal.