Business of Banking Companies
Synopsis
- Introduction
- Bank and Banking
- Objectives and Provisions of the Act
- Application of the Act
- Forms of Business of Banking Companies
- Cases
- Conclusion
1. Introduction
The Banking Regulation Act, 1946 (Hereinafter the Act) deals with the laws related to Banks and the Banking system in India. The powers and functions of the banks have been defined under the Act and the forms of business in which a bank may be engaged in has been discussed under S. 6 of the Act.
2. Bank and Banking[i]
- 5(b) of the Act defines the term “Banking” as an act in which money is accepted to be deposited in the account of a person and can be withdrawn at any time by that person by cheque or draft or order or otherwise. Such money accepted as deposit is further used give loans to persons in need of money that needs to be repaid with interest after a period of time.
- 5(c) further defines “Banking Company” as any institution that carries on the act of “Banking” is called a banking company.
The Section further explains that any institution that is involved in manufacture and trade of its products and accepts deposit only to finance its business shall not constitute Banking Company under the provisions of the Act.
3. Objectives and Provisions of the Act[ii]
This Act was passed for the purpose of attaining varied objectives which are as follows:
- Prior to this act Companies Act 1913 used to regulate Banks as well but it failed to do so effectively and therefore need was felt for an act that specifically deals with Banks and Banking Companies.
- Earlier there was no minimum requirement of capital because of which banking companies failed. So this act also provided for a minimum capital for banking companies.
- Another objective of this Act was to avoid competition between the banks. So, the act regulates the number of branches and changing locations of such branches as well.
- The Act provides for a system of licensing so as to ensure systematic development of this sector.
- To ensure smooth functioning of Banks the Act also gives power to the RBI to appoint, remove or reappoint senior officials of the Banks.
- This act also makes provisions for cash reserve ratio and liquidity reserve ratio to protect the interests of the public and basically the depositors.
- It also makes provision for amalgamation of weaker banks with stronger ones so as to ensure smooth functioning of the system.
- It also restricts foreign banks from investing money of Indian depositors outside India.
- Provisions have also been made for quick and easy liquidation of banks.
4. Application of the Act
- 2 of the Act states that the provisions of this Act are in addition to any provisions made under other Acts including Companies Act, 2013.
However, S.3 excludes the applicability of the act on –
- agricultural credit society primary in nature;
- any co-operative land mortgage bank; and
- any other co-operative society which is not included under part V of the Act.
The Act has been made applicable on three categories of Banking Companies:
- Nationalized banks
- Non-nationalized banks
- Co-operative banks as specified under Part V of the Act.
5. Forms of Business of Banking Companies
- 6 of the Act deals with various forms of business that a banking company is allowed to do under the act. There is a list of such functions provided hereunder and explained under four headings as-
- a) Main functions
- The first and foremost function of a bank is to lend or advance money. It can do so with or without taking up security for the purpose of advancing such loan.
- A bank can deal in various instruments like bills of exchange, drafts, railway receipts, hundies, promissory notes, drafts etc. whether they are transferrable/ negotiable or not.
- Banks can also issue letter of credits, travellers cheque or circular notes.
- It can also facilitate buying and selling of gold, silver and other such varients.
- Banks in India can also deal in foreign exchange including foreign currencies.
- Banks can acquire, hold or issue on commission or otherwise deal in securities and investments of all kinds including shares, debentures, stock, bonds etc.
- It can negotiate on loans and advances of all kinds.
- It can also provide for safe keeping of bonds, scripts or other valuables of people that they are afraid of keeping at their home premises.
- It can also work on collecting and transmitting of money securities.
- It can contract public and private loans and can engage itself in negotiating terms of such loans and issuing the same.
- It can deal in any kind of indemnity or guarantee business.
- It can manage, sell or otherwise realise any property that comes in its possession as full or part satisfaction of repayment of any loan.
- It can hold, acquire or otherwise deal in any property that comes to it in form of security for any loan.
- It can undertake and execute trusts and also administer it as execute or trustee or otherwise.
- It can establish or support in establishment of or aid in such establishment of associations or institutions.
- It can acquiesce, construct, maintain or otherwise alter any building or work necessary or convenient for its own purposes.
- While working for itself a bank can sell, improve, manage, develop, exchange, lease, mortgage, dispose of or turn into account or otherwise deal with all or any part of the property and rights related to it.
- It can do anything or perform any function that is beneficial, incidental or conducive to advancement of its own business or promotes it in any way.
- It can also perform any other function that Central Government may authorise it from time to time through publication in official gazette and specifies that how its engaging in such activity would be beneficial for the development of its business.
- b) Banking Companies as Agency
- While acting as agency of government or any local or other authority the banks can engage in clearing and forwarding of goods, grants receipts or act as attorney on behalf of its customers.
- However, it cannot act as Managing Agent or Secretary or Treasurer of a Company.
- In discharge of its function as an agency of State a bank can effect, insure, guarantee, underwrite or participate in managing of loans, public or private or issue of stock, debentures or shares of any company, corporate or association. It can also lend money for such purposes.
- On behalf of Companies or associations or institutions a bank can calculate the benefits of employees or ex-employees of such companies or associations or institutions or any other person attached to it and can grant pensions or other allowances to them or make insurance payments on their behalf.
- On behalf of its customers it can collect instruments and securities and proceed accordingly with such instruments or securities.
- It can act as an authorised dealer while exchanging foreign currencies.
- It can collect taxes, bills or other dues on behalf of its customers.
- c) General utility functions[iii]
- Banks provide lockers for the safekeeping of valuables that people would not like to keep at home in fear of getting stolen or otherwise. The banks therefore provide for safekeeping of such valuables and other important documents.
- It also provides safe deposit vaults to its customers under a lease agreement.
- These days with an advancement of technology and computerisation of all the functions, the banks have also starting providing for Tele-banking, Mobile banking, Online banking, DEMAT services for securities trading, ATM services, etc.
- d) Consultancy functions
- As part of consultancy services, a bank can provide for issuing salaries or pensions or other sort of remunerations to the employees, ex-employees or other people connected to other associations or institutions which are customers of the bank.
- It provides for Electronic Clearing Services for its customers to clear several dues of its customers.
6. Cases
· United Commercial Bank v. Bank of India [iv]
It was held by the court in this case that a buyer cannot instruct a bank not to pay the holder of instrument if the bill of exchange produced in front of it and all the accompanying documents are in strict compliance with the letter of credit.
The court in its obiter dicta also stated that the obligation of the bank to pay under an irrevocable letter of credit is absolute and cannot be overridden by the mere instruction of the customer stating otherwise.
Hence the court in the appeal of this case had disallowed the interim injunction passed by the lower court stating that it is not appropriate in this case.
· Canara Bank vs. K.S. Seetharama[v]
In this case a coffee farmer had taken a sum as loan for the purpose of farming of such coffee. While returning the loan the farmer had paid all the sum due along with complete interest.
Meanwhile a government policy was introduced for the benefit of farmers whereby the amount of interest had to be shared in three parts and the farmer would be liable only for 1/3rd of it.
The farmer in this case had already paid all the interest amount and had applied for return of 2/3rd of amount in compliance with the government policy.
It was held by the court that the Bank was obligated to follow the guidelines issued by the government. The decision of court was also upheld in the appeal that the bank should return the the 2/3rd amount of interest paid by the farmer in compliance of the policy of government.
· State Bank of India vs. Anand Prakash[vi]
In this case the petitioner had presented a cheque in a branch which was not cleared and the amount was not credited in his account even after a lapse of reasonable period of time. The respondent no. 1 did not respond to the complaints made by the petitioners for a long time.
The petitioners filed a suit in which the respondent no. 1 contended that the cheque had to be cleared form some other branch at Mumbai and they had already sent the cheque to them for clearing.
It was found that the cheque got lost in the transit and therefore could not be cleared. The respondent no. 2 contended that since they never received the cheque they could not clear it.
The matter in issue in this case was whether the drawee bank can shift their liability for loss of instrument on the bank to which such cheque was drawn.
The court held that such liability cannot be shifted and that the drawee bank was liable to pay for the amount along with the interest so applied.
· Federal Bank Ltd v. State of Kerala[vii]
The court held in this case that banking business includes sale of pledged ornaments and therefore any transaction made in concluding such sale shall be made taxable under any applicable law.
7. Conclusion
The banking companies as defined under the Act have been given authorised to do certain functions in different authorities that form the subject matter of business of banking companies. The banking companies therefore cannot act out of their own will but are obligated to perform such functions as authorised to them under the Act.
