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Unit 3 - Regulation of Banking Business Flashcards

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1
Q

What are the two essential functions a bank necessarily performs, as defined by Section 5(b) of the Banking Regulation Act, 1949?

A

A bank necessarily performs two essential functions: 1. Acceptance of deposits from the public. 2. Lending or investment of such deposits.

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2
Q

According to Section 5(b) of the Banking Regulation Act, 1949, how must deposits of money from the public be repayable for it to constitute ‘banking’?

A

Deposits of money from the public must be repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.

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3
Q

Which entities are authorized to accept deposits withdrawable by cheque, as per Section 49A of the Banking Regulation Act?

A

Only banking companies, the Reserve Bank of India, the State Bank of India, or any other banking institution, firm or person notified by the Central Government are authorized to accept deposits withdrawable by cheque.

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4
Q

Are government savings bank schemes subject to the restriction on accepting deposits withdrawable by cheque under Section 49A of the Banking Regulation Act?

A

No, nothing contained in Section 49A of the Banking Regulation Act shall apply to any savings bank scheme run by the Government.

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5
Q

How are deposits accepted by non-banking financial companies regulated?

A

Acceptance of deposits by non-banking financial companies is regulated by the Reserve Bank under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 and other directions issued by it under Chapter IIIB of the Reserve Bank of India Act.

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6
Q

What is required in India for commencing or carrying on the business of banking, according to Section 22 of the Banking Regulation Act?

A

In India, it is necessary to have a licence from the Reserve Bank under Section 22 of the Banking Regulation Act for commencing or carrying on the business of banking.

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7
Q

What word must every banking company use as part of its name, according to Section 7 of the Banking Regulation Act?

A

Every banking company has to use the word ‘bank’ as part of its name.

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8
Q

Can a company other than a banking company use the words ‘bank,’ ‘banker,’ or ‘banking’ as part of its name?

A

No, no company other than a banking company can use the words ‘bank,’ ‘banker,’ ‘banking’ as part of its name.

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9
Q

What are some of the permitted activities for banks under Section 6(1) of the Banking Regulation Act, in addition to deposit acceptance and lending/investing?

A

Some permitted activities include dealing in Bills of Exchange, lending or advancing money with or without security, carrying on guarantee and indemnity business, and managing/selling property acquired in satisfaction of claims.

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10
Q

What type of activities is a banking company prohibited from engaging in directly or indirectly under Section 8 of the Banking Regulation Act?

A

A banking company is prohibited from engaging directly or indirectly in trading activities and undertaking trading risks, including buying, selling, or bartering of goods.

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11
Q

How long can a banking company hold any immovable property not required for its own use, as per Section 9 of the BR Act?

A

No banking company shall hold any immovable property, however acquired, except such as is required for its own use, for any period exceeding seven years from its acquisition or the commencement of the Act, whichever is later, or any extension.

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12
Q

What is the primary aim of the Reserve Bank of India Act, 1934?

A

The primary aim of the Reserve Bank of India Act, 1934, is ‘to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage’.

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13
Q

Which sections of the Banking Regulation Act authorize the Reserve Bank to issue directions to banks?

A

The Reserve Bank is authorized to issue directions to banks under Sections 21 and 35A of the Banking Regulation Act.

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14
Q

Are directions issued by the RBI under Sections 21 and 35A of the BR Act binding on banks?

A

Yes, directions issued by the RBI under Sections 21 and 35A are statutory in nature and binding on the bank or banks to which they are addressed.

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15
Q

What principle did the Gujarat High Court uphold in RBI vs Harisidh Co-op. Bank Ltd. regarding RBI’s power to issue directions?

A

The Gujarat High Court upheld that the RBI’s power to issue directions must be exercised with bona fide intentions.

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16
Q

Besides giving directions, what other powers does the RBI have to influence banking companies, as per Section 36 of the BR Act?

A

As per Section 36 of the BR Act, the RBI is empowered to caution or give advice to Banking Companies, or prohibit them from entering into particular transactions.

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17
Q

What is acknowledged as the ‘essence of banking business’ by Section 5(b) of the Banking Regulation Act?

A

The acceptance of deposits from the public withdrawable by cheque is acknowledged as the essence of banking business.

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18
Q

What types of deposits do banks accept?

A

Banks accept different types of deposits, both time deposits (like fixed or recurring deposits, repayable after an agreed period) and demand deposits (like current and savings bank accounts, repayable on demand).

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19
Q

What does Section 35A(c) of the BR Act specifically authorize the RBI to do regarding acceptance of deposits?

A

Section 35A(c) of the BR Act authorizes the RBI to ‘issue such directions as it deems fit’, which covers regulating the acceptance of deposits in public interest or in the interest of banking policy or depositors.

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20
Q

When did the RBI transition to primarily prescribing only moratoriums and minimum/maximum periods for deposits and interest rates for NRI deposits?

A

In its quest to provide greater autonomy to Banks, the RBI presently only prescribes any moratorium on acceptance of deposits wherever felt necessary, the minimum and maximum period for which deposits can be accepted by Banks and interest rates in respect of NRI deposits.

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21
Q

How frequently do banks have to file a return on their unclaimed deposits under Section 26 of the Banking Regulation Act?

A

Banks have to file a return every year on their unclaimed deposits within thirty days of the end of each calendar year.

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22
Q

For fixed deposits, when does the ten-year period for being classified as ‘unclaimed’ start for filing returns under Section 26 of the BR Act?

A

In the case of fixed deposits, the period of ten years starts from the expiry of the period of the deposit.

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23
Q

What fund was introduced by the Amending Act of 2013 under Section 26A of the BR Act?

A

The Depositor Education and Awareness Fund (DEAF) was introduced under Section 26A to take over inoperative deposit accounts.

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24
Q

What is the primary purpose of the Depositor Education and Awareness Fund (DEAF)?

A

The primary purpose of DEAF is to create awareness among customers and to carry out other promotional activities specified by the RBI, utilizing unutilized deposits from banks for customer welfare.

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25
What are some examples of amounts that constitute 'unclaimed deposits' and are transferred to the Depositor Education and Awareness Fund (DEAF)?
Unclaimed deposits include: loan accounts after due appropriation, margin money against LCs/Guarantees, outstanding telegraphic/mail transfers, demand drafts, pay orders, bankers cheques, sundry deposit accounts, vostro accounts, inter-bank clearing adjustments, unadjusted NEFT/ATM credit balances, undrawn prepaid card balances, and rupee proceeds of foreign currency deposits.
26
What happens to amounts payable in foreign currency that remain unclaimed for ten years or more when transferred to the DEAF?
They are converted into Indian Rupees at the exchange rate prevailing on that date and in the event of a claim, the Fund is liable to refund only the Indian Rupees received.
27
What is the current interest rate payable by banks on interest-bearing deposits transferred to the RBI for the Depositor Education and Awareness Fund, as of May 11, 2021?
As of May 11, 2021, the interest rate payable is 3 per cent p.a. until the time of payment to the depositor/claimant.
28
What provisions exist in the Banking Regulation Act for nomination in respect of articles kept in safe custody and Safe Deposit Lockers?
Sections 45ZC and 45ZE provide that any person who leaves articles in safe custody or in Safe Deposit Lockers may nominate one person as nominee to receive the article in the event of death.
29
What rules govern the form and procedure for nominations related to safe custody articles and safe deposit lockers for banking companies and co-operative banks?
Rules 3 and 4 of the Banking Companies (Nomination) Rules, 1985, and Rules 3 and 4 of the Co-operative Banks (Nomination) Rules, 1985 deal with the form and procedure.
30
What must a bank ensure before giving access to the contents of a safe deposit locker to a nominee/survivor?
The bank must exercise due care and caution in establishing the identity of the survivor(s)/nominee(s) and the fact of death of the locker hirer by obtaining appropriate documentary evidence.
31
Which section of the Banking Regulation Act empowers the Reserve Bank to issue directions regarding loans and advances?
The Reserve Bank is empowered under Section 21 of the Banking Regulation Act to issue directions to regulate loans and advances.
32
What aspects of loans and advances can the Reserve Bank regulate under Section 21 of the Banking Regulation Act?
The RBI can regulate the purpose for which advances may or may not be made, margins to be maintained, maximum amount of advances or financial accommodation, maximum amount of guarantees, and rate of interest and other terms and conditions.
33
What is the purpose of 'Selective Credit Control' (SCC) measures imposed by the RBI?
The purpose of SCC measures is to prevent speculative hoarding of essential commodities and basic raw materials using bank credit, ensuring prices of essential commodities are not increased by profit maximization.
34
Which section of the Banking Regulation Act imposes restrictions on loans and advances to directors and entities in which they have substantial interest?
Section 20 of the Banking Regulation Act imposes such restrictions.
35
What kinds of loans and advances are generally barred by Section 20 of the BR Act regarding directors of a banking company?
Loans and advances are barred to firms or private companies in which a director holds substantial interest or is a director, manager, managing agent, employee or guarantor, and to individuals where the director is a partner or guarantor.
36
What approval is required for a banking company to remit any debt to its directors, as per Section 20A of the Banking Regulation Act?
A banking company requires prior permission of the Reserve Bank under Section 20A of the Banking Regulation Act to remit any debt to its directors.
37
What does MCLR stand for and what did it replace as a lending rate system?
MCLR stands for Marginal Cost of Funds Based Lending Rate. It replaced the Base Rate system as a benchmark for all rupee loans sanctioned and credit limits renewed from April 1, 2016.
38
What are the main components that comprise the MCLR?
The MCLR comprises of: (a) Marginal Cost of funds (Marginal cost of borrowings and return on net worth). (b) Negative Carry on account of CRR. (c) Operating Costs. (d) Tenor Premium.
39
What is the key difference between MCLR and Base Rate regarding the cost of funds?
The MCLR is determined by the current cost of funds, whereas the Base Rate is governed by the average cost of funds.
40
How does MCLR calculation differ from Base Rate calculation in terms of premium/margin?
The MCLR is calculated by considering tenor premium, while the Base Rate is calculated by considering minimum rate of return/profit margin.
41
What were the three major areas of internet banking focused on by the RBI's Working Group on Internet Banking?
The three major areas were: Technology and security issues, Legal issues, and Regulatory and supervisory issues.
42
What should banks have regarding security for internet banking, as per RBI guidelines?
Banks should have a security policy duly approved by the Board of Directors defining segregation of duty of Security Officer/Group dealing exclusively with information systems security and Information Technology Division.
43
What is a key legal issue addressed by RBI's Internet Banking guidelines regarding account opening?
All account opening requests received over the Internet should be opened only after proper physical verification of the identity of the customer.
44
What is the requirement for connectivity between an inter-bank payment gateway and the computer system of a member bank?
Connectivity between the gateway and the computer system of the member bank should be achieved using a leased line network (not through Internet) with appropriate data encryption standard.
45
What are the minimum capital adequacy and net NPA requirements for a Scheduled Commercial Bank to offer internet banking?
A bank must have a CRAR of at least 9% for the preceding two completed years and the accounting year for which it proposes to declare dividend, and Net NPA less than 7%.
46
Under which section of the Reserve Bank of India Act does the RBI have the power to regulate money market instruments?
The Reserve Bank of India (Amendment) Act, 2006 (Section 45W) empowers RBI to regulate money market instruments.
47
What entities are permitted to issue Certificates of Deposits (CDs) as per RBI's Master Direction dated June 4, 2021?
Scheduled Commercial Banks, Regional Rural Banks, and Small Finance Banks are permitted to issue CDs.
48
What is the definition of a 'Commercial Paper' as per RBI's notification dated August 10, 2017?
A Commercial Paper is defined as a 'money market instrument' under Section 45W of the Reserve Bank of India Act.
49
What is the minimum credit rating required for a Commercial Paper (CP) as per SEBI's rating symbols and definitions?
The minimum credit rating for a CP shall be 'A3' as per rating symbol and definition prescribed by SEBI.
50
What is the standard definition of an 'Ombudsman' in the context of public grievances?
An Ombudsman is generally an authority (official) appointed to receive and investigate on the public grievances against the Government or any other authority or institution or organization and redress such grievances as a non-adversarial adjudicator.
51
What is the legal basis for the Reserve Bank - Integrated Ombudsman Scheme, 2021?
The Scheme is framed by the Reserve Bank in exercise of powers conferred under Section 35A of the Banking Regulation Act, 1949, Section 45L of the Reserve Bank of India Act, 1934, and Section 18 of the Payment and Settlement Systems Act, 2007.
52
What is a key feature of the Reserve Bank - Integrated Ombudsman Scheme, 2021, regarding the cost to the customer?
The scheme provides for cost-free redress of customer complaints.
53
What is the role of the 'Principal Nodal Officer' appointed by a Regulated Entity under the Integrated Ombudsman Scheme, 2021?
The Principal Nodal Officer, not below the rank of a General Manager in a Public Sector Bank or equivalent, is responsible for representing the Regulated Entity and furnishing information on its behalf regarding complaints.
54
In what circumstances will the Ombudsman decline jurisdiction to pass an order or award on a complaint?
The ombudsman will decline jurisdiction if the subject matter of the dispute has been taken to the debts recovery tribunal or a civil court or an arbitrator or to any other competent forum.
55
What did the Supreme Court rule in Canara Bank vs P.R.N. Upadhyaya regarding the Banking Ombudsman's adherence to RBI directions?
The Supreme Court observed that the Ombudsman, appointed under Section 35A of the BR Act, is obliged to comply with directions/circulars and notifications issued by the Reserve Bank under Section 35A or 21 of the Act.
56
What did the Allahabad High Court rule in M/s Hindustan Ferro and Industries Ltd. vs Debt Recovery Tribunal regarding the Banking Ombudsman scheme and the DRT Act?
The Allahabad High Court observed that the Banking Ombudsman scheme cannot override the provisions of the Recovery of Debts and Bankruptcy Act, as the scheme relates to service complaints while the Act focuses on debt recovery.
57
How has the RBI defined 'financial stability' in its first 'India Financial Stability Report' published in March 2010?
Financial stability is defined as 'a situation in which the financial sector provides critical services to the real economy without any discontinuity'.
58
What percentage of its annual profits must every banking company incorporated in India transfer to a reserve fund, as per Section 17(1) of the BR Act?
Every banking company must transfer a sum equivalent to not less than twenty per cent of such profits to the reserve fund.
59
When must the transfer of profits to the reserve fund be made, according to Section 17(1) of the BR Act?
Such transfer of profits to the reserve fund has to be made before any dividend is declared.
60
Under what conditions may a banking company be exempted from the requirement to transfer profits to a reserve fund?
If a banking company has adequate paid-up capital and reserves in relation to its deposit liabilities, the Reserve Bank may recommend exemption to the Government, provided the existing reserve fund and share premium account are not less than the paid-up capital.
61
What is the duty of every banking company that is a scheduled bank regarding cash reserves?
Every banking company which is a scheduled bank has a duty to maintain certain cash reserve with the Reserve Bank under Section 42 of the Reserve Bank of India Act.
62
What provision governs the maintenance of cash reserve for non-scheduled banks?
Section 18 of the Banking Regulation Act provides for the maintenance of cash reserve for non-scheduled banks.
63
What are the minimum requirements for a bank to be included in the Second Schedule of the Reserve Bank of India Act, 1934?
A bank must have a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakh and satisfy the RBI that its affairs are not conducted in a manner detrimental to depositors' interests.
64
What is the quantum of cash reserve (CRR) required to be maintained by a scheduled bank with the Reserve Bank, as per Section 42(1) of the RBI Act?
An average daily balance, being such per cent of the total of the demand and time liabilities in India of that bank as notified by the Reserve Bank from time to time.
65
What minimum daily CRR balance are Scheduled Commercial Banks (SCBs), Small Finance Banks (SFBs), and Payments Banks required to maintain for a reporting fortnight?
SCBs, SFBs, and Payments Banks are required to maintain a minimum CRR of not less than ninety per cent of the average daily required reserves on all days of the fortnight.
66
How frequently must every scheduled bank submit a return to the Reserve Bank showing its demand and time liabilities for CRR purposes?
Every scheduled bank has to submit a return as at the close of business on each alternate Friday, not later than seven days after the date to which it relates.
67
Where must non-scheduled banks maintain their cash reserve, as per Section 18 of the BR Act?
Non-scheduled banks can maintain their cash reserve with the bank itself, or in a current account with the Reserve Bank, or by way of net balance in current accounts, or in one or more of these ways.
68
What is the minimum percentage of demand and time liabilities that non-scheduled banks must maintain as cash reserve?
The balance maintained by non-scheduled banks should not be less than three per cent of the demand and time liabilities as on the last Friday of the second preceding fortnight.
69
What specific type of incremental credit disbursements are banks allowed to deduct from their Net Demand and Time Liabilities (NDTL) for CRR maintenance, as an incentive?
Banks are allowed to deduct the equivalent amount of incremental credit disbursed as retail loans to automobiles, residential housing, and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level as at January 31, 2020.
70
What duty does every banking company have regarding the maintenance of Statutory Liquidity Ratio (SLR) under Section 24 of the Banking Regulation Act, 1949?
Every banking company has a duty to maintain a certain percentage of their Net Demand and Time Liabilities as assets in India, in the form and manner specified by the Reserve Bank by notification.
71
What is the maximum percentage of total demand and time liabilities that a scheduled bank may be required to maintain as assets in India under SLR?
A scheduled bank shall maintain in India, assets, the value of which shall not be less than such percentage not exceeding 40 per cent of the total of its demand and time liabilities in India.
72
What is the penalty for a banking company if its balance on any alternate Friday falls below the minimum CRR requirement?
The banking company is liable to pay to the Reserve Bank penal interest at the rate of three per cent above bank rate on the shortfall for the day.
73
If the CRR default recurs on the succeeding alternate Friday, how does the penal interest rate change?
If the default recurs on the succeeding alternate Friday, the penal interest is raised to five per cent above the bank rate on the shortfall.
74
What percentage of its demand and time liabilities in India must every banking company maintain as assets in India at the close of business on the last Friday of every quarter, as per Section 25 of the BR Act?
The assets in India of every banking company shall not be less than seventy-five percent of its demand and time liabilities in India.
75
What is the purpose of Section 25 of the BR Act, which requires banks to maintain a certain percentage of assets in India?
This provision is meant to ensure that the resources mobilized by banks operating in India, especially foreign banks, are largely invested within the country.
76
What types of assets qualify for meeting the requirement under Section 25 of the BR Act (assets in India)?
The assets may be in cash, gold or unencumbered approved securities.

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