Regulation of Banking Business for JAIIB 2022

Regulation of Banking Business: The Reserve Bank of India Act of 1934 and the Banking Regulation Act of 1949 control the banking industry in India. The RBI and the Government of India have been given the authority to regulate the banking business from their inception till their closure. This unit discusses how the Government of India and the RBI regulate and control banking in India. It also emphasizes the aspects of several legislative frameworks such as the RBI Act of 1934 and the BR Act of 1949, both of which have laws that apply to banking. The RBI’s function as the country’s central bank, as well as its roles as regulator, supervisor, and facilitator, have been discussed.

Introduction- Power to Issue Directions

• The Reserve Bank is empowered to provide instructions to banks under Sections 21 and 35 of the Act.
• Section 21 of the BR Act of 1949 grants the authority to control advances made by banks. The RBI authorised banks to control the loans and advances they make.
• Section 35A of the BR Act of 1949 gives the RBI the authority to issue bank instructions and take action such as to prohibit any banking company’s affairs from being conducted in a way that is harmful to depositors’ interests or destructive to the banking company’s interests and to achieve greater governance and control,
• Section 36 of the BR Act of 1949: The RBI has the authority to caution or prohibit any banking business about any transaction or series of activities.

Acceptance of Deposits

• Regulation of Bank Deposit Acceptance: The Banking Regulation Act has no particular rules for regulating bank deposit acceptance. However, Section 35A, which allows the RBI to issue directives, is broad enough to encompass deposit acceptance.
• Unclaimed Deposit Returns: Following Section 26 of the Banking Regulation Act, banks are required to make an annual return on their unclaimed deposits. The return must be made in the appropriate form and manner within 30 days of the end of each calendar year, and it must cover all deposits that have not been operated for 10 years. In the case of fixed deposits, the 10-year term begins when the deposit period expires.

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Nomination

• Article of safety lockers and safe custody: The Banking Regulation Act also includes nomination rules for objects held in safe custody by banks and safety lockers. Sections 45ZC and 45ZE state that anybody who places an item in safe custody or safety lockers with a financial firm can name a nominee to receive the item in the case of that person’s death. The nomination must be completed in the required form, and the bank receives a valid discharge upon the return of objects held in safe custody or the removal of the contents of the locker by nominees in the manner specified. Rule 3 and 4 of the Banking Companies (Nomination) Rules, 1985 govern the form and method for objects in safe custody and safety lockers in banking companies and cooperative banks, respectively.
• Section 45ZA of BR Act: When a deposit is held by a financial company to the credit of one or more people, the depositor or, in some cases, all the depositors collectively, may nominate one person to whom the deposit will be transferred in the event of the death of the single depositor or all the depositors. In the event of the depositor’s death, unless the nomination is modified or rescinded, the nominee is eligible for all of the depositor’s rights. There is also a mechanism for minor candidates to designate someone to accept the deposit on their behalf.

Regulation of Loans, Advances and Interest Rates

• Regulation of Loans and Advances: Section 21 of the Banking Regulation Act empowers the RBI to issue directives to limit advances made by banks.
• In exercising its powers under Section 21, the RBI issues orders from time to time controlling the lending activities of banking institutions. In addition, the broad powers to issue directions under Section 35A can be used to regulate loans and advances.
• Loan and advance limitations: Section 20 of the Banking Regulation Act places limits on loans and advances.
• Limitations on the ability to remit debt: A banking business must obtain prior authorization from the RBI under Section 20A of the BR Act before remitting any debt to its orders.
• Interest rates: By Section 21 (with Section 35A) of the BR Act, the RBI has the authority to regulate interest rates.

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