VI

RBI’s Control Over Bank’s in India : A Study of Legislativ

Provisions and Judicial Trends

Page No.
Preface........................................ .............,................................................ i-iii
Acknowledgement.......................................................................................... iv-v
Contents......................................................................................................... vi-xx
Abbreviations.................................................................................................. xxi-xxiii
List of Cases..................................... .............................................................. xxiv-xxvii
Chapter-1 HISTORICAL BACKGROUND 1-48
1. Introduction 1-2
2.0rigin of the word “Bank” 2
3. Meaning, Definitions and Scope 2-6
(i) General 2
(ii) Meaning & Scope of Bank 3
(iii) Definition’s under British Law 3
(iv) Definition under U.S. A. Law 4-5
(v) Definitions under Indian Law 5-6
4. History of Banking 6-8
(i) Ancient Period 6-7
(ii) Middle Period 7-8
5. Development of British Banking 8-11
(i) Bank of England 9
(ii) The Peels Act, 1844 10
(a) The Monopoly of Bank-Note 10
(b) Regulation of Issueof Bank-Note in England 10
(c) Nationalisation of Bank of England 11
6. Banking Institution in India 11-12
(i) Money economy 11
(ii) Epic age 11
(iii) Smriti Period 12
(iv) Buddhist period 12
(v) Muslim period 12
(vi) Mughal period 12
 Vll

(vii) Advent of East India Company 12

7. Establishment of joint stock banks 13
8. Banking Law in India : A Retrospect 14-15
(i) Law towards Negotiable Instruments Act, 1881 15
(ii) Law as to Bankers Books Evidence Act, 1891 15
9. Development in Twentieth Century 16-17
(i) Swadeshi movement 16
(ii) Other Joint stock banks 17
10. Genesis of Central Banking in India 18-37
(i) Plan of Warren Hastings 18
(ii) Robert Rickards's Scheme 21
(iii) Proposal for a ‘Great Banking Establishment for British India’ 21
(iv) Structural Changes in Constitution of Banks in 1858 22
(v) Proposals for a Large ‘National Banking Establishment’ 23
(vi) Proposed Amalgamation of Presidency Banks 24
(a) Principle of Limited Liability 24
(b) Crisis in Banking 1862-65 25
(vii) A Bank on the Model of the Bank of France and the
Netherlands Bank 25-27
(viii) The Fowler Committee and Schemes of Rothschild & Hambro 28
(ix) Chamberlain Commission and Question of State and Central Bank 29
(x) Keynes's Proposals for a State Bank 30
(xi) Mr. Abrahams's Scheme 31
(xii) The Chamberlain Commission's Recommendations 31
(xiii) Establishment of the Imperial Bank of India 31-34
(xiv) Hilton Young Commission Report 34-35
(xv) Scheme of the Reserve Bank of India 35-36
(xvi) Nationalisation of the Reserve Bank of India 37
1 l.Types of Banks 37-43
(i) Scheduled Commercial Banks 37-38
(ii) Non-Scheduled Commercial Banks 38-39
(iii) Public Sector Bank 39
(iv) New Private Banks 39
(a) Indian Banks 39
 Vlll

(b) Foreign Banks 39

(v) Local Area Banks 40
(vi) Regional Rural Banks 40
(vii) The Cooperative Banks 40-41
(vii) Industrial Development Bank of India (IDBI) 41 -42
(ix) Export Import Bank of India (EXIM Bank) 42
(x) National Bank for Agriculture and Rural Development (NABARD) 42
(xi) National Housing Bank (NHB) 42-43
12. Legal Status of a Bank 43-45
13. Present situation 45
14. Review 46-48
Chapter - 2 RESERVE BANK OF INDIA : CENTRAL BANKING 49-81
1. General 49
2. Reserve Bank of India Act, 1934 49-50
(i) Statement of Objects and Reasons 50-51
(ii) Salient Features of the Reserve Bank of India Act 51 -52
(iii) Constitutional Validity 52
3. Meaning and Definitions of Central Bank 52-53
4. Nature and Concept of Central Banking 53-54
5. Organisational Structure of the Reserve Bank of India 54-57
(A) Central Board 55-56
(i) One Governor and four Deputy Governors 56
(ii) Four Directors Nominated from the Local Boards 56
(iii) Ten other Directors 56
(iv) One Government Official 56-57
(B) Local Boards 57-58
6. Frame work and Department of RBI 57-59
7. Objectives of Reserve Bank of India 59-60
8. Principles of Central Banking 60-61
(i) National Welfare 60
(ii) Monetary and Financial Stability 61
(iii) Freedom from Political influence 61
9. Business which the RBI may transact 61-62
10. Business which the RBI may not transact 62-63
 IX

IX. Functions of the Reserve Bank of India 63-76

(i) Reserve Bank as Note, issuing Authority 63-64
(a) Assets of the Issue Department 64-65
(b) Regulation of Monetaiy Mechanism of Economy 66
(ii) Reserve Bank as Banker to the Central and State Governments 66-67
a) Adviser to Government 67
(iii) Reserve Bank as Bankers Bank and lender of Last Resort 69
(iv) Control of Banks 69
(v) Control over banks credit 69
(vi) Custodian of Exchange Reserve 70
(a) Exchange Control 70-72
(vii) Collection of Data and Publications 72
(viii) Promotional and Development Functions 72-73
(ix) The Role of Reserve Bank as a Regulator 73-76
(i) Checks and Balances 75
(ii) Responsibility of the Board 75
(iii) Disclosure and Transparency 76
12. Promotional Role of Reserve Bank of India: A Critical Appraisal 76-77
13. Board for financial supervision 77-78
14. Autonomy for Central Bank 78-80
15. Review 80-81
Chapter - 3 CONTROL OVER ORGANISATION OF BANKS 82-138
1. General 82
2. Banking Regulation Act, 1949 82-87
(i) Introduction 82
(ii) Statement of Objects and Reasons 83
(iii) Salient Features of the Act 84
(iv) Scope of the Banking Regulation Act 85
(v) Application of Banking Regulation Act 85-87
3. Powers of Reserve Bank to Issue and Cancellation of Lincence 87-91
(i) License to be issued by Reserve Bank 87
(ii) Conditions to be Fulfilled 87-88
(iii) Licence to Company Incorporated Outside India 88-89
(iv) Cancellation of Licence 89-91
 X

4. Opening of New Branches and Transfer of Existing ones 91-94

(i) Temporary Branch 91-92
(ii) Conditions for Granting Permission 92
(iii) Revocation of permission 92
(iv) Permission to Regional Rural Bank 92-93
(v) Places of business 93-94
5. Minimum paid up Capital and Reserves 94-97
0) Foreign Banking Company 94
(ii) Other Banking Companies [ Sub. Sec (3)] 95-96
(iii) Deposits of Foreign Company Security for Creditors 96
(iv) Aggregate Value 96
(v) Dispute as to Aggregate Value 96-97
6. Regulation of Paid-up Capital, Subscribed Capital,
Authorized Capital and voting rights 97-98
(i) Subscribed Capital 97
(ii) Voting Rights 97-98
(iii) Immunity to Shareholders from Questioning Title 98
(iv) Disclosure of Shareholding by Chairman, 98
Managing Director, Chief Executive Officer
7. Election of New Directors 99
8. Restriction on Commission on Sale of Shares 99
9. Prohibition of Charge on Unpaid Capital 99-100
(i) Prohibition of Floating Charge on Assets 99-100
(ii) Appeal against Refusal Certificate 100
10. Restrictions on Payment of Dividend 100-101
(i) Depreciation and Bad Debts 101
(ii) Non- applicability of section 15(1) 101
11. Prohibition of Common Directors 101
12. Restriction on Nature of Subsidiaries Companies 102
(i) Formation of Subsidiaries 102
(ii) Shareholding in other Companies 102
13. Board of Directors 103-104
0) Qualifications 103
 XI

(ii) Substantial interest 103-104

(iii) Period of office 104
(iv) Reconstitution of Board 104
14. Banking company to be managed by whole time chairman 105-107
(i) Chairman on Whole Time Basis 105
(ii) Chairman on Part-Time Basis 105-106
(iii) Qualification 106
(iv) Resignation from office 106
(v) Removal of person not fit and proper 106-107
15. Power of Reserve Bank to appoint chairman of the banking
company 107-108
16. Holding of Qualification Shares by Officials 108
17. Compensation for Loss of Office 108
18. Restrictions on Employment and Remuneration 108-111
(i) Disqualifications 108-110
(ii) Remuneration 110
(iii) Persons who can be Appointed to Position of Management 110-111
19. Powers of the Reserve Bank of India to control advances by
Banking Companies 112-117
(i) Directions as to Advances without Laying Down any Policy 112
(ii) RBI Circulars binding on banks 113-114
(iii) Monthly Returns 114
(iv) Accounts and balance-sheet 114 !

(v) Audit 114-115

(vi) Submission of returns 115
(vii) Inspection 115-116
(viii) Directions 116-117
20. Moratorium, Reconstruction or Amalgamation of Banking
Companies 117-127
(a) Moratorium 117-118
(i) Stoppage of Payment by Banking Company 118
(ii) Opportunity of being heard 118
(b) Scheme for reconstruction or amalgamation [sub-ss. (4) & (5)] 119-122
(c) Bind Force of Scheme 122-127
 Xll

(d) Suspension of Business and Winding up of Banking Companies 127

21. Control Over Management 127-130
(i) Power to Remove Managerial Personnel and other Persons
from Office 128
(ii) Reasonable Opportunity of Being Heard 128
(iii) Appeal to Central Government 128-129
(iv) Disqualification from Banking Management 129
(v) Penalty for Contravention of Order 129
(vi) Appointment of Suitable Person 129
(vii) No Compensation for Removal 129-130
22. Additional Directors 131
(i) Power of Reserve Bank to Appoint Additional Directors 131
(ii) Tenure and Terms of Appointment 131
23. To override Other Laws 131-132
24. Penalties Under the Act 132-134
(i) Submission of False Statement 132
(ii) Failure to Produce the Document 132
(iii) Acceptance of Deposits in Contravention of Order 132
(iv) Contravention of Provisions or Defaults Under the Act 133
(v) Default has been Committed by a Company 133
(vi) Persons Involved with Consent or Connivance 133-134
(vii) Chairman, Directors, etc. to be Public Servants 134
25. Cognizanee of Offences 134
26. Power of Reserve Bank to Impose Penalty 134-136
27. Review 136-138
Chapter-4 MONETARY AND CREDIT CONTROL BY RBI 139-180
1. General 139
2. Credit Control: Meaning 139-140
3. Objectives of Credit Control 140-141
(i) Stability of Internal Price-Level 140
(ii) Checking Booms and Depressions 140
(iii) Promotion of Economic Growth 140
(iv) To Regulate and Expand Banking 141
(v) Stabilisation of the Money Market 141
 Xlll

(vi) Stability in Exchange Rates 141

(vii) Preparation for war and other Emergencies 141
4. Methods of Credit Control in India 142-164
(I) Quantitative Methods 142
(A) Bank Mate or Discount Rate Policy 143
(i) Meaning 143
(ii) Conducive Conditions for the Bank Rate Policy 144
(a) Close Relationship between Bank Rate and other Interest Rates 144
(b) Existence of an Elastic Economic System 144
(c) Existence of Short Term Funds Market 144
(d) Limitation of Bank Rate Policy 145
(B) Refinance Policy 145
(i) Food Credit Refinance 146
(ii) Export Credit Refinance 146
(iii) 182 Days Treasury Bills Refinance Facility 146
(iv) General Refinance Facility 147
(C) Open Market Operations 147
(D) Variable Cash Reserve Ratio 148-149
(i) Meaning 149-152
(ii) Penalty for not maintaining proper CRR by the bank 152
E) Statutory Liquidity Requirement (SLR) 152-153
(i) Basis for Maintenance of S.L.R. 153-154
(ii) Submission of Monthly Return on Form VIII 154
(iii) Penalties for Default in Maintenance of Liquid Assets 154-155
(II) Qualitative or Selective Credit Controls 155
(i) Objectives 156
(ii) Tools of Selective Credit Control 156
(a) Fixation of Party-Wise Ceiling on Credit 156
(b) Regulation of Minimum Margin 156-157
(c) Fixation of Minimum Lending Rate 158
(d) Issue of Directives 158-161
(e) Moral suasion 161
(f) Rationing of Credit 162
(g) Credit Authorisation Scheme (CAS) 162
 XIV

(h) Credit Monetary Arrangements 162

(i) Direct Action 162-163
(j) Publicity 163
(k) Post sanction supervision, controland monitoring of credit 163
(i) Legal Control 163
(ii) Physical Control 163
(iii) Financial Control 164
(iv) Off-site and on-site inspection and supervision. 164
(v) Off-site supervision by banks 164
5. Limitations of Selective Credit Controls 164-165
6. Monetary Policy: Meaning 165-166
7. Features of Monetary Policy of the Reserve Bank of India 165-167
(i) Active Policy 166
(ii) Controlled Money Supply 166
(iii) Seasonal Variations 166
(iv) Flexible 166
(v) Investment and Saving Oriented 166
(vi) Wide Range of Methods of Credit Control 166 .
8. Limitations of Monetary Policy of India 167-170
(i) Limited Scope of Monetary Policy in Economic Development: 167
(ii) Limited Role in Controlling Prices 168
(iii) Poor Banking Habits 168
(iv) Underdeveloped Money Market 168
(v) Existence of Black Money 168
(vi) Conflicting Objectives 168
(vii) Lack of Coordination with Fiscal Policy 169
(viii) Limitations of Monetary Instruments 169
(ix) Lack of Banking Facilities 169
(x) Persuasive-Policy 169
(xi) Imbalance in Credit Allocation 169
(xii) Poor Implementation 170
9. Suggestions for Improvement of Monetary Policy and 170-171
Recommendations of the Chakravarty Committee
(i) Price Stability 170
 XV

00 Coordination of Monetaiy and Fiscal Policies 170

(iii) Flexible Rate of Interest 170
(iv) Strengthening Money Market 170
(v) Monetaiy Targeting 171
(Vi) Credit Planning 171
(vii) Proper Implementation 171
10. New Monetary Policy of the RBI 171-177
11. Monetaiy Policy for the Year 2009-10 177-179
12. Review 179-180
Chapter- 5 SOCIAL CONTROL OVER AND
NATIONALIZATION OF BANKS 181-211
1. Introduction 181-183
2. The Concept of Social Control 183-184
3. The scheme of social control 184-186
(i) National Credit Council 184-185
(ii) Amendment of the Banking Regulation Act, 1949 185-186
4. Nationalisation of Commercial Banks 187-189
5. Acquisition and Transfer of Undertakings Act, 1969 189-190
6. Limited application of Banking Regulation Act, 1949 to
new banks 191-192
7. Public Sector Banks as Scheduled Banks 192
8. Management of the Nationalised Banks 192-194
9. Nationalisation of six more banks 194-195
10. Objects 195-196
11. Motives behind Bank Nationalisation 196-197
12. Nationalization of Banks and Judicary 197-203
13. Arguments for Nationalisation 203-206
(i) Large Profits 203
(ii) Promote the interests 204
(iii) Decentralisation of Economic Power 204
(iv) Stabilising the Price 204
(v) Lending to Priority Sectors 204
(Vi) Favourable Attitude of the Banks 204
(vii) Eliminates Wasteful Competition 204
 XVI

(viii) Deposit Mobilisation 205

(ix) Interest of Community 205
(x) Implement its Monetary Policy more Effectively 205
(xi) Goal of Socialism 205
(xii) Distribution of Credit 205
(xiii) Standardisation of Banking Services 205
(xiv) Remove Disparities 205
(xv) Check Tax Evasion 205
(xvi) State Ownership 205
(xvii) Catering to the Financial Needs 206
(xviii) Nationalization Adopted by Different Countries 206
14. Arguments against Nationalisation 206-209
(i) Financial Burden 206
(ii) Risky and Less Remunerative Such Loans 206
(iii) Socialism as State Capitalism is not Socialism 206
(iv) Malpractices 206
(v) Reduce the Efficiency 207
(vi) Concentration of Wealth 207
(vii) No Security to Depositors 207
(viii) EraofPrivatision 207
(ix) Slowed Down the Services 207
(x) Corruption and Favouritism 207
(xi) Diluted the Quality of Manpower 207
(xii) Diversification of Functions 208
(xiii) Inter-State Rivalries 208
(xiv) Undue Favour to their Directors 208
(xv) Encouraged Speculative Activities 208
(xvi) No Substantial Improvement in Credit 208
(xvii) Unsound Monetary and Fiscal Policies 208
(xviii) Creation of Black Money 208
15. Review 209-211
 XVII

Chapter -6 BANK FRAUDS :CONCEPT AND DIMENSIONS 212-249

1. Introduction 212-213
2. Fraud: Meaning and Definition 213-215
(i) Essential Elements of Frauds 214
(ii) Scope 215
3. Bank Fraud: Meaning and Concept 215-217
(i) General 215
(ii) Meaning and Concept 215
(iii) Components of Fraud 217
4. Fraud Prevention and Detection 217
5. Prevention of Frauds 217-219
(i) Recruitment and Selection 217
(ii) Private Lives of Staff 218
(iii) No Undue Reliance 218
(iv) Basic Honesty 218
(v) Routine 218
(vi) Supervision and Audit 218
(vii) Unscrupulous Parties ■ 218
(viii) Danger Signals 219
(ix) Vigilance 219
6. Detection of Frauds 219-220
7. Frauds in Computerized Banking Environment 220-221
8. Classification of Frauds under IPC 221-237
(i) Cheating-Section 415, IPC 222-224
(ii) Criminal Misappropriation of Property-Section 403, IPC 224
(iii) Criminal Breach of Trust-Section 405, IPC 224-225
(iv) Forgery- Section 463 IPC 225-230
(a) Forgery of Drawer's signature 226-227
(b) Detecting of forged cheques: 227
(c) Protection Against Forgery 227-230
(v) Falsification of Account - Section 477A,IPC 230-231
(vi) Theft-Section 378, IPC 231-233
(vii) Extortion Section 383, IPC 233
(viii) Burglary (House Breaking)-Section 445, IPC 233
 xviii

(ix) Robbery and Dacoity-Sections 390 and 391, IPC 233-234

(x) Criminal Conspiracy-Section 120A, IPC 234-235
(xi) Bribery and Corruption 235-236
(xii) Offences Relating to Currency-Notes and Bank- Notes
489A-489E, IPC 236-237
9. Nature of Offences 237-238
10. Duty of the Public to Give Information of Certain 238
Offences
11. First Information Report 239
12. Fraud Prone Areas in Different Accounts 239-241
(i) Saving Bank Accounts 239
(ii) Current Accounts 240-241
13. Preventive Measure Relating to Frauds in Cash of Advances 242
14. Preventive Measure in Respect of Frauds in Case of Inter-
Branch Accounts 242-243
15. Prevention and Control of Frauds in Case of
Remittances 243
16. Measures to Counteract Frauds by Employees 242-245
17. An Expert Committee on Bank Frauds
(Chairman: Dr. N. L. Mitra) 245
18. Role of Reserve Bank of India in Frauds reported by banks 246-248
19. Review 248-249
Chapter- 7 EMERGING TRENDS OF BANKING
SYSTEM IN INDIA 250-297
1. General 250
2. Meaning of Electronic Banking 250
3. Growth of Electronic Banking 251
4. Products of E-Banking 251-280
(i) Automated Teller Machines (ATMs) 252-257
"ii) Internet Banking 257-271
(iii) Phone and Tele Banking 271-272
(iv) Mobile Banking 272-273
y) Tele-Banking vis.-a-vis Mobile banking 273
vi) Smart Cards 274-275
 XIX

(vii) Credit Cards 275-280

5. Payment and Settlement Systems in India 280-283
(i) MICR Clearing 282
(ii) High Value Clearing 283
(iii) Inter-Bank Clearing 283
(iv) Real-Time Gross Settlement System (RTGS) 283
(v) SSS and FEC 283
6. Recent Developments 284-288
(i) Retail Payment Systems 284
(ii) Electronic purse (e-purse) 285
(iii) Cheque Truncation System (CTS) 285
(iv) Electronic Clearing Service 285-286
(v) Card-based Payment System 286
(vi) E-Payment 286
(vii) National Financial Switch (NFS) 286-287
(viii) Large Value Payment Systems 287-288
7. RBI Overview on Payment and Settlement System 288-290
8. E-Security Aspects of Banking 290-292
9. Cyber Laws - A Remedy to e-Security 292
lO.Objectives of the IT Act 292-293
11. RBI's Initiatives for Regulating e-Security-related Issues 294-295
12. Review 295-297
Chapter-8 CONCLUSION AND SUGGESTIONS 298-335
A. General 298-299
B. Conclusion 299
(i) No Consensus on Universal Definition of Bank, Banker
and Banking Company 300
(ii) Long and Ancient History 300-301
(iii) Mughal period 301-302
(iv) Modem Banking during British Period 302-304
(v) Whether Bank is a ‘State’ Under the Art.12 of the Constitution 304-305
(vi) Maintainability of a Writ Petition 305
(vii) R.B.I. Set-Up and Functioning 305-307
(viii) Control Mechanism of Banks 308-311
 XX

(ix) Monetary and Credit Control Mechanism 311-313

(x) Social Auditing of Nationalised banks 313-315
(xi) Argument in Favour of Nationalization of Banks 315-316
(xii) Argument against Nationalization of Banks 316-318
(xiii) Bank Frauds 318-319
(xiv) Products of E-Banking 319-322
(xv) Shortcomings of the Indian Banking System 322-324
(xvi) Measures Taken to Improve the Banking System 324-327
(xvii) New Private Banks 327
(xiii) Entry into Insurance Business 327-328
(xix) Banking Sector Reforms (1998) 328-330
(xx) Failures of the Reserve Bank of India 330-331
(xxi) Achievements of the Reserve Bank of India 331-332
(xxii) Suggestions 332-335