Legal Framework of Regulation of Banks in India
· Banking is defined in section 5(b) of the Banking Regulation Act as the acceptance of deposits of money from public for the purpose of lending or investment. Such deposits may be repayable on demand or otherwise and withdrawable by check, draft order, or otherwise.
· Thus, a Bank must perform two essential functions: 1) Acceptance of public deposits, and 2) Lending or investment of such deposits.
· Accepting deposits from “public” implies that a banker accepts deposits from anyone who offers money for such purposes. However, a banker can refuse to open account for undesirable persons and further, the opening of accounts is subject to certain conditions like proper introduction and identification.
· The “Know Your Customer” guidelines issued by the Reserve Bank of India require Banks to follow certain customer identification procedures for opening of accounts for protecting the banks from frauds, etc., and also for monitoring transactions of a suspicious nature for the purpose of reporting to appropriate authorities for taking anti money laundering measures and combating financing of terrorism.
Deposits Withdrawable by Check
· Under section 49a of the Banking Regulation Act, no organization other than a bank is authorized to accept deposits withdrawable by check.
· The Saving Bank Scheme run by Indian government, a primary credit society and may other person or firm notified by the government are exempted from this prohibition.
Acceptance of Deposits by Non- Banking Entities
· There are also non-banking companies, firms and other unincorporated associations of persons and individuals who accept deposits from the public.
· Acceptance of deposits by non-banking financial companies is regulated by the Reserve Bank of India under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 and other directions issued by it under Chapter 3b of the Reserve Bank of India Act.
· Other companies are regulated by the central government under the companies (Acceptance of Deposit) Rules, 1975 issued under Section 58A of the Companies Act, 1956.
· Individuals, firms and other unincorporated associations of persons whose business includes the business of financial institution or whose principal business is acceptance of deposits, is prohibited under section 45s of the RBI Act (as amended in 1997) from accepting deposits from the public, except relatives.
· This prohibition does not apply to acceptance of deposits by those who are mainly engaged in manufacturing or trading.
· In India, it is necessary to have a license from the Reserve bank under section 22 of the banking regulation act for commencing or carrying on the business of banking.
· Every banking company has to use the word “bank” as part of its name (section 7 of the act) and no company other than a banking company can use the words “bank”, “banker”, “banking” or “banking company” as a part of the name or for the purpose of business.
· Subsidiaries of banks and association of banks in certain cases as also primary credit societies are exempted from this restriction.