Regulatory Framework of Banks: formula sheet

Key formulas

Joint Committee under Section 45Y: when it applies

Difference of opinion on whether an instrument is a hybrid or composite instrument + falls within jurisdiction of RBI, SEBI, IRDAI or PFRDA → reference to Joint Committee

Applies despite anything in the RBI Act, the SEBI Act, 1992 or any other law. It covers the instruments listed in Section 45U and the policies and securities listed in Section 45Y(1)(ii).

Composition of the Joint Committee

Union Finance Minister (Chairperson); RBI Governor (Vice-Chairperson); Secretary DEA; Secretary DFS; Chairperson IRDAI; Chairman SEBI; Chairperson PFRDA

Seven members, all ex officio. The Secretary, Department of Financial Services, is the convener of meetings.

Who may make a reference

Section 45Y(3): RBI Governor, IRDAI Chairperson, SEBI Chairman or PFRDA Chairperson

The Finance Minister and the two Secretaries cannot make a reference.

Time limit and effect of decision

Decision within 3 months from the date of reference, given to the Central Government; binding on RBI, SEBI, IRDAI and PFRDA

The Committee follows such procedure as it considers expedient.

Classification of banks

Banks → Commercial (public, private, foreign, small finance, payments, regional rural) + Cooperative (urban, rural) ; also Scheduled / Non-scheduled

Scheduled means included in the Second Schedule to the RBI Act, 1934.

Purposes of the Bank (section 3(1))

RBI = take over currency management from the Central Government + carry on banking business under the Act

Two purposes. Write both in an answer.

Legal status (section 3(2))

Body corporate + perpetual succession + common seal + sue and be sued by its name

Learn the four attributes as a set.

Definition of Reserve Bank (Banking Regulation Act, section 5(l))

Reserve Bank = Reserve Bank of India constituted under section 3 of the RBI Act, 1934

Links the two Acts.

Directions to a banking company (Banking Regulation Act, section 36(1)(d))

Written order, in public interest or banking policy or to prevent affairs being conducted detrimentally to the bank or depositors

Power includes requiring a directors' meeting, deputing observers, and requiring changes in management.

Section 21, BR Act: policy on advances

RBI satisfied (public interest / depositors' interest / banking policy) → determines advances policy → banks bound to follow

Section 21(3) says every banking company must comply with directions given under this section.

Section 21(2): subjects of directions

(a) purposes of advances; (b) margins on secured advances; (c) maximum advances to one borrower; (d) maximum guarantees for one borrower; (e) interest rate and other terms

Limits in (c) and (d) consider paid-up capital, reserves and deposits of the bank. Learn the five heads in order.

Section 35A, BR Act: general directions

Grounds: public interest; banking policy; prevent affairs being detrimental to depositors or the bank; secure proper management

RBI may modify or cancel directions under 35A(2), on representation or on its own motion, with conditions.

Section 35AB and 35AA

35AB: RBI may direct banks on resolution of stressed assets. 35AA: Central Government may authorise RBI to direct banks to start insolvency under IBC

35AB also allows RBI to specify authorities or committees to advise banks. 'Default' in 35AA has its IBC meaning.

Section 45JA, RBI Act: NBFCs

RBI may determine policy and give directions on income recognition, accounting standards, provisioning, capital adequacy, deployment of funds

NBFCs are bound to follow. Section 45L lets RBI call for information and give directions to financial institutions to regulate the credit system.

Repo and reverse repo (section 45U)

Repo = borrow by selling securities, repurchase later. Reverse repo = lend by buying securities, resell later

Price at repurchase or resale includes interest. Both are money market instruments under the Act.

CRR versus SLR

CRR = cash with RBI. SLR = liquid assets held by the bank itself

Both are a percentage of net demand and time liabilities. The rates are set by RBI from time to time, so never quote a current rate as fixed law.

Minimum cash reserve (Section 42(1))

Required average daily balance ≥ notified % × total demand and time liabilities in India

The percentage is notified by the RBI in the Gazette. The Act no longer fixes a number, so never quote a figure as statutory.

Average daily balance

Sum of closing balances on each day of the fortnight ÷ number of days in the fortnight

A fortnight runs from Saturday to the second following Friday, both days inclusive.

Additional balance cap (Section 42(1A))

Additional balance ≤ notified rate × excess of liabilities over the base date's liabilities; never more than the excess

Applies on top of the balance under Section 42(1).

Penal interest for shortfall (Section 42(3))

First fortnight: Bank Rate + 3% on the shortfall; next fortnight and each later default fortnight: Bank Rate + 5% on the shortfall

Charged on the amount by which the balance falls short of the prescribed minimum.

Penalty for late or no return (Section 42(4))

₹100 for each day the failure continues

Payable to the RBI.

Eligibility for inclusion (Section 42(6))

Paid-up capital and reserves ≥ ₹5,00,000 (real value) + affairs not detrimental to depositors + prescribed type of entity

All three conditions must be met.

Trigger for reference

Difference of opinion on whether a hybrid or composite instrument (with a money market, securities or insurance component) falls within the jurisdiction of RBI, SEBI, IRDAI or PFRDA

The section applies notwithstanding the RBI Act, the SEBI Act, 1992 or any other law.

Composition of Joint Committee

Chairperson: Union Finance Minister | Vice-Chairperson: RBI Governor | Members: Secretary DEA, Secretary DFS, Chairperson IRDAI, Chairman SEBI, Chairperson PFRDA

Total seven. Secretary, DFS is the convener of meetings.

Who may refer

RBI Governor, Chairperson IRDAI, Chairman SEBI or Chairperson PFRDA (clauses (b), (e), (f), (g))

The Finance Minister and the two Secretaries cannot make a reference.

Time limit

Decision within 3 months from the date of reference, given to the Central Government

Procedure is as the Committee considers expedient.

Effect of decision

Binding on RBI, SEBI, IRDAI and PFRDA

Section 45Y(5).

Registration requirement

No NBFC may commence or carry on business without (1) a certificate of registration from the RBI and (2) the net owned fund the RBI specifies

Section 45-IA. The Act sets a statutory ceiling on the amount the RBI can specify. Quote the current figure only as an RBI notification, and only if you are sure of it.

Reserve fund

Transfer at least 20% of net profit each year, before declaring any dividend, to a reserve fund

Section 45-IC. The profit is as shown in the profit and loss account. A withdrawal from the fund may be made only for a purpose specified by the RBI, and the company must report it to the RBI within 21 days of the withdrawal.

Liquid assets

Hold in India, at the end of each quarter, assets of the type and percentage the RBI specifies, against deposits

Section 45-IB. The percentage is set by the RBI within a statutory ceiling. Do not quote a fixed figure from memory.

NBFC test

Financial institution that is a company + principal business is receiving deposits or lending (or as the RBI specifies)

Section 45-I. It is a test of principal business. Applying the RBI's asset-income benchmark is a regulatory practice, not Act text.

Powers of the RBI

Policy and directions to NBFCs (45JA); information and directions on deposits (45K); information and directions to financial institutions (45L); advertisement control (45MA); deposit and asset prohibition (45MB); inspection (45N); cancellation of registration (45-IA); supersession of the board (45-IE)

Learn the section numbers as labels for the powers. Cite only those you are sure of.

Appeal on cancellation

The RBI may cancel registration on the grounds listed in Section 45-IA(4). A company aggrieved by the order may appeal to the Central Government within 30 days of the order being communicated

Section 45-IA(4) lists the grounds for cancellation and Section 45-IA(6) gives the appeal. Always state the grounds and the 30-day appeal route together.

False statement (s. 58B(1))

Wilful false material statement, or wilful omission of a material statement: imprisonment up to 3 years + fine

Applies to applications, returns, statements, prospectuses or advertisements inviting deposits. Both wilfulness and knowledge matter.

Failure to furnish information (s. 58B(2))

Fine up to ₹1,00,000 per offence + further fine up to ₹5,000 for every day after the first if failure persists

Covers failing to produce books, accounts, documents or to answer questions as required.

Section 45-IA contravention (s. 58B(4A))

Imprisonment 1 to 5 years + fine ₹1,00,000 to ₹25,00,000

Both minimums are stated in the sub-section, and it contains no proviso allowing a lower sentence. Sub-section (4AAA) (non-compliance with a Company Law Board order) carries imprisonment up to 3 years, and the person is also liable to a fine of not less than ₹5,000 for every day the non-compliance continues. It too contains no proviso allowing a lower sentence. The 'special and adequate reasons' proviso appears only in sub-section (5A) (section 45S): there the minimum is one year's imprisonment and ₹1,000 fine, unless the court records special and adequate reasons in its judgment.

Unauthorised deposits / Chapter IIIB directions (s. 58B(5))

Imprisonment up to 3 years + fine up to twice the deposit received (or twice the deposit called for by a prospectus or advertisement)

Applies to a person other than an auditor. Covers receiving deposits without authority, non-compliance with Chapter IIIB directions, and wrong prospectus or advertisement.

Auditor default (s. 58B(4AA))

Fine up to ₹10,00,000

For an auditor failing to comply with a direction or order of the Bank under section 45MA.

Residual offence (s. 58B(6))

Fine up to ₹1,00,000 + further fine up to ₹10,000 per day after the first for continuing default

Applies when no specific penalty is given elsewhere.

RBI penalty on NBFC, general case (s. 58G(1)(a))

Penalty not exceeding ₹25,000

For contraventions or defaults of the nature referred to in section 58B. Needs a show-cause notice and reasonable hearing. Payable within 30 days of the demand notice (s. 58G(3)).

RBI penalty on NBFC, listed defaults (s. 58G(1)(b))

For s. 58B(4A) or 58B(5)(a)/(aa): ₹10,00,000 or twice the amount involved (if quantifiable), whichever is more. If the default continues: further penalty up to ₹1,00,000 per day after the first

This is not a cap. The penalty is at least ₹10,00,000 and rises with the amount involved. The daily further penalty attaches only to clause (b), not to clause (a). Same notice, hearing and 30-day payment rules apply.

RBI penalty on banking company (s. 47A, Banking Regulation Act, 1949)

For s. 46(3) contraventions: up to ₹20,00,000 per offence + further up to ₹50,000 per day after the first, and up to twice the deposits involved. For s. 46(4) contraventions: up to ₹1,00,00,000 (₹1 crore) or twice the amount involved (if quantifiable), whichever is more, + further up to ₹1,00,000 per day after the first

Needs a show-cause notice and reasonable hearing. The penalty is payable within 14 days of the demand notice (s. 47A(5)), not 30 days. The 30-day period belongs to NBFCs under s. 58G(3). Section 47A has its own bar on complaints for the same default.

Bar on double action (NBFCs only)

NBFC: penalty imposed by RBI under s. 58G ⇒ no complaint; complaint filed ⇒ no s. 58G penalty

Sections 58G(5) and 58G(6). The bar applies only where the defaulter is an NBFC and the RBI penalty is under section 58G. The RBI Act text supplied shows no such bar for other defaulters, so do not extend it to them. Banking companies have their own bar in section 47A.

Quick revision

• The RBI Act, 1934 and the Banking Regulation Act, 1949 are the two core statutes for this chapter.
• Section 45Y of the RBI Act sets up the Joint Mechanism for differences over hybrid or composite instruments.
• The Joint Committee is chaired by the Union Finance Minister, and the RBI Governor is Vice-Chairperson.
• Other Joint Committee members are the Secretaries of Economic Affairs and Financial Services, and the heads of IRDAI, SEBI and PFRDA.
• The Secretary, Department of Financial Services, convenes the Joint Committee meetings.
• Only the RBI Governor or the heads of IRDAI, SEBI or PFRDA may make a reference to the Joint Committee.
• The Joint Committee gives its decision to the Central Government within three months of the reference, and the decision binds the four regulators.
• Section 45Y of the Banking Regulation Act lets the Central Government, after consulting the RBI, make rules on how long banking companies keep books and paid instruments.
• Under Section 36 of the Banking Regulation Act, the RBI can caution banks, assist in amalgamations and, by written order, require changes in management.
• Section 51A of the Banking Regulation Act moves the RBI's powers over an International Financial Services Centre to the IFSCA, for products, services and institutions permitted there.
• Under Section 58 of the RBI Act, the Central Board makes regulations with the previous sanction of the Central Government, and they are laid before Parliament.

Common mistakes

• Saying the RBI alone regulates every bank in every respect. Fix: State that for cooperative banks the RBI regulates banking functions while the registrar of cooperative societies handles incorporation and management.
• Treating scheduled bank and commercial bank as the same thing. Fix: Remember the two tests: commercial or cooperative is about the type of institution; scheduled or non-scheduled is about inclusion in the Second Schedule.
• Saying the RBI was established by the Banking Regulation Act, 1949. Fix: The RBI is constituted under section 3 of the RBI Act, 1934. The 1949 Act only defines it and regulates banking companies.
• Listing only one purpose of the Bank. Fix: Write both: taking over currency management from the Central Government and carrying on banking business under the Act.
• Saying SLR is kept with RBI in cash. Fix: CRR is cash with RBI. SLR is held by the bank in liquid assets such as government securities.
• Mixing up repo and reverse repo. Fix: Repo: sell securities to borrow, repurchase later. Reverse repo: buy securities to lend, resell later. Say who is lending.
• Stating the cash reserve as a fixed percentage such as 3%. Fix: Say the RBI notifies the percentage from time to time in the Gazette, having regard to monetary stability.
• Treating the ₹5 lakh test as the only condition for inclusion. Fix: Always list all three: capital and reserves, no detriment to depositors, and the type of entity.
• Mixing up the two Sections 45Y. Fix: Always write the Act name. RBI Act: Joint Mechanism. Banking Regulation Act: rules on preserving bank records.
• Saying the Finance Minister or a Secretary can refer a dispute. Fix: Only the RBI Governor and the heads of IRDAI, SEBI and PFRDA can make a reference.

Exam tips

• Write the section number 45Y and the Act in the first line of any answer on regulator disputes.
• Learn the seven members of the Joint Committee in order, with the chair and vice-chair marked.
• Use headings in classification answers: commercial, cooperative, scheduled, non-scheduled. Examiners reward structure.
• In case-based questions, name the regulator for each component of the instrument before concluding.
• End with a practical compliance point, such as confirming which regulator's approval the company needs.
• Begin with section 3 of the RBI Act, 1934 for any question on establishment, and give both purposes.
• Connect the two Acts using section 5(l) of the Banking Regulation Act, 1949.
• Do not quote section numbers unless certain. State the rule clearly instead.