Unit 2: Regulatory & compliance framework
Banking Laws & Services notes · PTU syllabus (BCOP 621-18)
On this page
- Unit summary
- Reserve Bank of India Act, 1934: incorporation and management
- Central banking functions under the RBI Act
- Provisions for non-banking institutions and penalties
- Credit control techniques
- Banking Regulation Act, 1949: definitions and business
- Winding up of banking companies
- Key terms
- Quick revision
- Important questions
Unit summary
Two laws form the backbone of banking regulation — the RBI Act, 1934 and the Banking Regulation Act, 1949. This unit covers the incorporation and central banking functions of RBI, provisions for non-banking institutions, penalties, credit control techniques, and the definitions, business and winding up of banking companies under the BR Act.
After this unit you can
- Explain the incorporation, capital, management and central banking functions of RBI under the RBI Act
- Explain RBI Act provisions for NBFCs and penalties
- Explain credit control techniques
- Explain definitions, business restrictions and winding up under the Banking Regulation Act
PTU syllabus topics
- Reserve Bank of India Act 1934 — incorporation
- central banking functions
- provisions for non-banking institutions
- penalties
- credit control techniques
- Banking Regulation Act 1949 — definitions
- business of banking companies
- winding up
Governs
The RBI itself
Banking companies
Covers
RBI's functions and powers
Licensing, management, winding up of banks
Purpose
Central banking and monetary control
Safe and sound banking
Topic 1
Reserve Bank of India Act, 1934: incorporation and management
- Incorporation (Section 3): RBI constituted as a body corporate with perpetual succession and a common seal; started operations on 1 April 1935; original share capital ₹5 crore held by private shareholders, nationalised from 1 January 1949.
- Management (Sections 7–8): Central Board of Directors — Governor, up to four Deputy Governors, four directors from local boards, ten directors nominated by the Central Government, two government officials; the Central Government may issue directions to RBI in public interest after consultation with the Governor (Section 7).
- Preamble (amended 2016): to regulate the issue of bank notes, keep reserves for monetary stability, operate the currency and credit system, and operate a modern monetary policy framework — price stability while keeping in mind growth.
Topic 2
Central banking functions under the RBI Act
Note issue (Sections 22–27)
Sole right to issue bank notes; minimum reserve of ₹200 crore (gold ₹115 crore)
Banker to the Central and State Governments (Sections 20–21A)
Accounts, public debt management
Banker's bank (Section 42)
CRR maintained by scheduled banks
Lender of last resort (Section 17)
Loans and advances to banks
Monetary policy (Section 45ZA–45ZO)
Inflation target, Monetary Policy Committee
Foreign exchange management
With FEMA, reserves management
Credit information (Section 45C)
Collection of credit information
Payment systems
Under the Payment and Settlement Systems Act, 2007
- Section 17: permitted business of RBI — accepting deposits, discounting bills, granting loans against securities, buying and selling gold and government securities.
- Section 42: scheduled banks maintain CRR as a percentage of NDTL; penal interest on shortfall.
Topic 3
Provisions for non-banking institutions and penalties
- Chapter III-B (Sections 45H–45QB): regulation of NBFCs — compulsory registration with RBI (Section 45-IA) with minimum net owned funds; maintain liquid assets for deposits (Section 45-IB); transfer 20% of net profit to a reserve fund (Section 45-IC); RBI may issue directions on deposits, prudential norms, and inspect NBFCs.
- Chapter III-C: prohibition of acceptance of deposits by unincorporated bodies (beyond limits).
- Penalties (Section 58B–58G): for false statements, failure to comply with directions, unauthorised deposit acceptance — fines and imprisonment; RBI can impose monetary penalties (Section 58G) on NBFCs.
Topic 4
Credit control techniques
Aim
Regulate total credit volume
Regulate direction and use of credit
Instruments
Bank rate (Section 49), repo/reverse repo, CRR (Section 42), SLR (BR Act Section 24), OMO
Margin requirements, credit ceilings, credit rationing, moral suasion, direct action, regulation of consumer credit
Coverage
Whole economy
Specific sectors or borrowers
- Section 21 and 35A of the BR Act empower RBI to issue directions on advances (selective credit control).
Topic 5
Banking Regulation Act, 1949: definitions and business
- Banking (5(b))
- Accepting deposits for lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft or order
- Banking company (5(c))
- A company transacting the business of banking in India
- Demand liabilities (5(f))
- Liabilities payable on demand
- Secured loan (5(n))
- Loan secured by assets of value not less than the amount
- Approved securities (5(a))
- Securities in which trust money may be invested and other notified securities
- Section 6 — forms of business: borrowing, lending, discounting, dealing in bills, guarantees, collecting, safe deposit, acting as agent, underwriting, managing property for satisfaction of claims, leasing (with approval), etc.
- Section 7: use of the words "bank", "banker", "banking" restricted to banking companies.
- Section 8: prohibition of trading (buying/selling goods) except as part of realising security.
- Section 9: disposal of non-banking assets within 7 years.
- Section 10: management restrictions — no managing agents.
- Section 11: minimum paid-up capital and reserves.
- Section 12: capital structure — only ordinary shares (and preference shares as permitted).
- Section 15: no dividend until capitalised expenses are written off.
- Section 17: transfer of at least 20% of profit to reserve fund (RBI requires 25%).
- Section 18 and 24: CRR for non-scheduled banks and SLR (up to 40% of NDTL).
- Section 20: restrictions on loans to directors and their interests.
- Section 22: licensing of banking companies by RBI.
- Section 23: RBI permission for opening new branches.
- Section 35: inspection by RBI; Section 35A: RBI directions; Section 36AA: removal of managerial personnel.
Topic 6
Winding up of banking companies
- Suspension of business and moratorium (Section 45): RBI may apply to the Central Government for a moratorium and prepare a scheme of reconstruction or amalgamation (e.g., Global Trust Bank merged into OBC, 2004; Lakshmi Vilas Bank into DBS, 2020).
- Winding up by the High Court (Section 38 onwards): on RBI's application if the bank cannot pay debts, licence cancelled, or it is detrimental to depositors; RBI or DICGC may be appointed official liquidator (Section 38A).
- Preferential payment to depositors (Section 43A): depositors paid up to the DICGC insured amount first; DICGC pays insured deposits within 90 days (amendment 2021).
- Voluntary winding up only with RBI certification that the bank can pay all depositors.
Exam tip
Since banks are excluded from the IBC, bank failures are resolved under the BR Act — usually by amalgamation rather than liquidation, to protect depositors.
Key terms
- RBI Act, 1934
- Law constituting RBI and defining its central banking functions
- NBFC
- Non-banking financial company regulated under Chapter III-B of the RBI Act
- Banking company
- Company transacting banking business in India
- Moratorium
- Temporary suspension of a bank's business while a scheme is prepared
- Statutory reserve
- Transfer of a part of profits to the reserve fund under Section 17
Quick revision
- RBI: 1935, nationalised 1949; Central Board; price stability mandate.
- Functions: note issue, banker to government and banks, lender of last resort, monetary policy.
- NBFCs: registration (45-IA), liquid assets (45-IB), 20% reserve (45-IC).
- BR Act: Section 5 definitions; 6 business; 22 licensing; 24 SLR; 35A directions.
- Winding up: moratorium, amalgamation, High Court winding up, DICGC 90 days.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.When was RBI nationalised?
- Q2.What is Section 42 of the RBI Act?
- Q3.What are the obligations of NBFCs under Section 45-IC?
- Q4.Define banking under the BR Act.
- Q5.What does Section 22 of the BR Act provide?
- Q6.What is a moratorium on a bank?
Long-answer questions
- Q1.Explain the incorporation, management and central banking functions of RBI under the RBI Act.
- Q2.Explain the provisions of the RBI Act relating to NBFCs and penalties.
- Q3.Explain the business of banking companies and restrictions under the Banking Regulation Act.
- Q4.Explain the provisions relating to suspension, amalgamation and winding up of banking companies.
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