Banking law & Practices Assignment

Master of commerce (Banking and Finance)

Part – II
Sem - 3

Under the Faculty of Commerce

BY

AARTI SURENDRA KAPREKAR

Roll no.15

K.P.B. HINDUJA COLLEGE OF COMMERCE

315, NEW CHARNI ROAD , MUMBAI – 400004

Q.1 What is the primary objective of the reserve Bank of India (RBI).

The Reserve Bank of India (RBI) is the central bank of India, established in 1935 under a
special act of the parliament. It is responsible for determining the country's monetary
policy and plays a pivotal role in maintaining financial stability and fostering economic
The Reserve Bank of India (RBI) is the apex financial institution of the country’s financial
system entrusted with the task of control, supervision, promotion, development and
planning. RBI is the queen bee of the Indian financial system which influences the
commercial banks’ management in more than one way. The RBI influences the management
of commercial banks through its various policies, directions and regulations. Its role in bank
management is quite unique. In fact, the RBI performs the four basic functions of
management, viz., planning, organizing, directing and controlling in laying a strong
foundation for the functioning of commercial banks.
In 1921, the Imperial Bank of India was established to perform as central bank of India by
the British Government. But unfortunately Imperial Bank failed to show its performance up
to the mark and didn’t achieve any success as the Central Bank. Then the Government asked
the Hilton Young Commission in 1925 to view on this subject. The commission submitted
their reports saying that one single organization can’t be able to act as two separate
agencies (both credit and currency control). So, it’s required to set up a brand new central
bank. In 1st April 1935, Reserve Bank of India was set up. In January, 1949, RBI was
nationalized.

Objectives of Reserve Bank of India

The Reserve Bank of India was established with the main motto of regulating all the banks in
India. The objective was to keep in check the reserves as well as the issue of bank notes.
So, it was done to secure the monetary stability and thereby to operate the credit system
and currency of the country to its own advantage.
Prior to the RBI, the government of India and the Imperial Bank of India were unable to
control the Indian financial system by keeping it in check.
Therefore, a committee led by the Hilton and young commission in 1935, shifted the entire
financial system to the RBI.
So, the primary target for RBI was to control and regulate the various financial policies and
help in the development of the banking facilities throughout India.
The primary objective for the RBI would be to regulate the various banking functions for
India in the money market. Thus, they focus mainly on issuing new notes.
The RBI was established with the aim of being a banker’s bank and also the bank for the
government. Its task was to promote the economic growth of the country through various
frameworks and economic policies of the government.

1) Primary objects: Preamble to the RBI Act, 1934 spells out the objectives of the RBI as:

(a) To regulate the issue of bank notes.

(b) To keep reserves with a view to securing monetary stability in India.
(c) To operate currency and credit system of the country to its advantage.
Prior to the establishment of the RBI, the Indian financial system was totally inadequate on
account of the inherent weakness of the dual control of currency by the Central Government
and of credit by the Imperial Bank of India. The Hilton-Young Commission, therefore,
recommended division of functions and responsibility for control of currency and credit and
the divergent policies by setting-up of a central bank called the RBI – which would regulate
the financial policy and develop banking facilities throughout the country. Hence, the RBI
was established with this primary object in view.

(2) Remain free from political influence: Another objective of the RBI has been to remain
free from political influence and be in successful operation for maintaining financial stability
and credit.
(3) Fundamental objects: Fundamental object of the RBI is to discharge purely central
banking functions in the Indian money market i.e. to act as –

(a) Note-issuing authority

(b) Bankers’ bank
(c) Banker to government
(4) Promote the growth of the economy: RBI aims to promote the growth of the economy
within the framework of the general economic policy of the Government, consistent with
the need of maintenance of price stability.
(5) Development of Indian Economy: A significant object of the RBI has also been to assist
the planned process of development of the Indian economy. Besides the traditional central
banking functions, with the launching of the 5 year plans in the country, the RBI has been
moving ahead in performing a host of developmental and promotional functions, which are
normally beyond the purview of a traditional Central Bank.
Q.2 Explain the role of the RBI in promoting financial stability.

The Reserve Bank of India (RBI) is India’s central bank and a key financial institution
responsible for maintaining monetary stability and ensuring the soundness of the country’s
financial system. The role of RBI in financial stability includes.
India’s banking reforms and the role of RBI
Over the years, India has witnessed significant reforms in its banking sector, with the
Reserve Bank of India steering the course of these transformative initiatives. The RBI has
actively championed the adoption of prudent banking practices, risk management protocols,
and stringent regulatory frameworks to ensure the stability and integrity of India’s banking
institutions. By introducing stringent capital adequacy norms, asset quality reviews and
stress testing mechanisms, the RBI has strengthened the resilience of Indian banks and
financial institutions, thereby fortifying the overall financial ecosystem against potential
economic shocks. The implementation of robust regulatory measures and governance
frameworks has positioned the RBI as a key catalyst in driving the evolution and growth of
India’s banking sector, paving the way for a more robust and secure financial landscape.
 Issuing and managing the currency of India

 Formulating and implementing monetary policies to maintain price stability, manage

inflation, and control money supply
 Influencing borrowing costs and, in turn, the money supply in the economy by setting
the repo rate and reverse repo rate
 Regulating the banking sector in India by providing licenses to banks and foreign
banks to establish their branches in India
 Keeping reserves with a view to securing monetary stability and is called banker to
banks.

1.Monetary Authority/Management: One of the most important

duties of the RBI is to design and implement monetary policy as well as to
guarantee monetary stability in India. It uses the financial and credit systems to
its advantage.
2. Supervision Of Financial System: a strong regulatory system,
the RBI serves to protect the interests of depositors. maintaining thorough
oversight of the bank's operations and its solvency, as well as ensuring overall
financial stability through several policy decisions.

3. Regulation of Foreign Exchange Market,

Government Securities Market, and Money Market
  The Indian foreign exchange market is governed by the RBI. The FEMA Act of
1999's provisions are how RBI oversees and manages the foreign exchange
market.
 The RBI oversees the trading of securities by the federal and state
governments. It has the jurisdiction to control this thanks to the RBI Act of
1934.
 According to the wording of the RBI Act of 1934, the RBI has the power to
regulate short-term and highly liquid debt securities.

4. Foreign Exchange Reserve Management

The responsibility for managing India's foreign exchange reserves lies on the RBI. The
management of foreign exchange reserves is governed by the RBI Act of 1934's
legislative regulations. According to the RBI Act of 1934, the RBI is permitted to invest
these foreign exchange reserves in the following instruments. They are Deposit money
with foreign banks, Deposit with one of the commercial banks abroad, and Debt
instruments.

5. Bankers to the Central and State Governments

RBI serves as the government's banker. The RBI is in charge of receiving and
disbursing funds on behalf of various government agencies. Additionally, RBI is
permitted to appoint additional banks to serve as its agents and conduct banking
operations on the government's behalf. The Central and State Governments'
Consolidated Funds, Contingency Funds, and Public Accounts are all maintained by
the RBI. As a lender to the government, RBI also extends loans to the federal, state,
and territorial governments.

6. Government's Advisor

When asked to advise the government on financial and banking-

related issues, RBI does so.

7. Debt Manager Of Central And State Governments

The primary goals of the debt management strategy are to reduce borrowing costs
and even out the debt's maturity structure. On behalf of the federal government and
state governments, RBI manages the nation's debt and issues fresh loans.

8. Banker To Banks
To maintain their SLR and CRR, banks open current accounts with the RBI. The RBI
serves as a central banker for all of the individual banks and facilitates the settlement
of money transfers between banks. RBI makes short-term loans and advances to
banks for specific uses or in need.

9. Issuer Of Currency

To provide an adequate number of genuine and clean notes, the government and the
RBI are in charge of the design, production, and overall administration of the national
currency. To facilitate the movement of rupee notes and coins around the country, the
Reserve Bank of India has granted permission to some bank branches to establish
currency chests. (A currency chest is a storage where currency notes and rupee coins
are kept on behalf of the RBI).

10. Developmental Role

The RBI's involvement in economic growth involves setting up organizations to

construct financial infrastructure, ensuring credit to the economy's productive sector,
and increasing access to accessible financial systems.

Conclusion

In conclusion, the Reserve Bank of India stands as a cornerstone of India’s financial

infrastructure, wielding significant influence over the country’s monetary policies,
regulatory frameworks, and overall economic stability. With its multifaceted role as the
central banking institution, the RBI’s steadfast commitment to maintaining financial
stability, fostering economic growth, and promoting financial inclusivity has played a
pivotal role in shaping India’s economic narrative.

Q.3 Discuss the key provision of the act related to bank licensing
and branch expansion.
The Banking Regulations Act of 1949 stands as a cornerstone of India’s financial framework,
shaping the landscape of banking in the country. This pivotal legislation was introduced to
regulate the banking sector, ensuring stability and protecting depositors’ interests. With a
focus on promoting a sound banking system, it empowers the Reserve Bank of India to
oversee and guide banking operations.
Understanding the nuances of this act is essential for grasping how India’s banking sector
has evolved. From licensing banks to enforcing compliance, the act lays down the rules that
govern financial institutions, fostering transparency and accountability. As the banking
environment continues to change, the relevance of the Banking Regulations Act remains
paramount in safeguarding economic integrity.

Licensing of Banks
Licensing of banks is a fundamental aspect of the Banking Regulations Act. The Reserve Bank
of India (RBI) controls the licensing process, requiring banks to obtain formal approval before
commencing operations. Applicants must meet specific criteria, including adequate capital,
sound management, and adherence to prudent banking practices. The act mandates regular
assessments of licensed banks to ensure compliance and maintain the integrity of financial
institutions. Violation of provisions may result in the cancellation or suspension of a bank’s
licence.
It’s no secret that starting a bank is a process. But what are the specific licensing
requirements to open a bank in your jurisdiction? This article will provide an overview of the
banking licensing requirements for new banks, including the licenses and permits required
to open and operate a bank
Banking Licenses Every New Bank Needs
The first step in starting a bank is to obtain the proper banking licenses. Depending on the
bank’s business model, different types of licenses are required. For example, if the bank
offers credit products, it must obtain a credit license.
There are two main types of banking licenses: onshore and offshore. Onshore banking
licenses are typically obtained from the bank’s home country regulator, while offshore
banking licenses are obtained from regulators in other countries.
Offshore Banking Licenses
There are a few reasons why a bank might choose to obtain an offshore banking license. For
example, it allows them to tap into new markets and customers by offering banking services
in a foreign country.
Several jurisdictions around the world offer offshore banking licenses. Some popular
jurisdictions include the Bahamas, Cayman Islands, and Gibraltar.
To obtain an offshore banking license, the bank must first incorporate it in the jurisdiction of
choice. Then, once incorporated, the bank must apply for a banking license from the
jurisdiction’s financial regulator.

Onshore Banking Licenses

Many banks choose to obtain an onshore banking license. Onshore banking licenses are
typically obtained from the bank’s home country regulator. The application process for an
onshore banking license is similar to that for an offshore banking license.
Once the bank has been granted a license, just like with an offshore bank, it will be subject
to ongoing regulation by the home country’s financial regulator. Again, the bank must
maintain certain capital levels and comply with anti-money laundering regulations.

BRANCH EXPANSION
The Reserve Bank of India (RBI) has permitted the opening of mini branches or banking
outlets across the country for all domestic scheduled commercial banks except Regional
Rural Banks without having to take permission from the regulator on a case-by-case
basis1. Banks have been asked to formulate a detailed mid-term corporate plan for branch
expansion for a three-year period, covering all categories of branches/offices having
customer contact, including specialized branches, extension counters, and ATMs2. In 2005,
RBI initiated a branch authorization policy reform that incentivizes banks to expand new
branches in the “underbanked” districts defined as having a district population per bank
branch higher than the national average3. In terms of these provisions, banks cannot,
without the prior approval of RBI, open a new place of business in India or abroad or
change, otherwise than within the same city, town or village, the location of the existing
place Of business.
MUMBAI: In a bid to take banking services to the remote locations of the country, the
Reserve Bank of India has permitted the opening of mini branches or banking outlets across
the country for all domestic scheduled commercial banks except Regional Rural Banks
without having to take permission from the regulator on a case-by-case basis.
Banking outlet is a fixed-point service delivery unit manned by either the bank staff or its
business correspondents where services of acceptance of deposits encashment of cheques
withdrawal or lending of money is provided," said the RBI.

The RBI has clarified that ATM kiosks, cash depositing counters and mobile branches will not
be treated as banking outlets. They have to be left open for at least 4hours per day for 5
days in a week manned either by business correspondents or by bank officials. If the space is
not kept open for the minimum hours mentioned it will be considered as a part time banking
outlet
This set of regulations come as a breather for payment banks and small finance banks who
are planning to take banking to rural India mostly through small physical business
correspondent touch-points.

In 2005, the Reserve Bank of India (RBI) initiated a branch authorization policy reform that
incentivizes banks to expand new branches in the “underbanked” districts defined as having
a district population per bank branch higher than the national average. This paper uses a
regression discontinuity design to explore the impacts of this bank branch expansion policy
on labour market outcomes. Using household data from the National Sample Survey
matched with RBI’s district-level banking data, I find that, after four years, the bank branch
expansion policy caused a roughly 15% increase in individuals’ daily wage and a 17%
increase in weekly total labour earnings in the treatment districts relative to the control
districts. Although there is no significant impact on overall employment, the results suggest
that the policy reform leads to a reallocation of labour from agriculture to non-agriculture. I
also find that the individuals in the treatment districts are more likely to report being regular
employees but less likely to report being casual labourers relative to control districts.

Q.4 Discuss the role of bank and financial institution in preventing

money loundering.
What Is Money Laundering?
Money laundering is an illegal activity that makes large amounts of money generated by
criminal activity, such as drug trafficking or terrorist funding, appear to have come from a
legitimate source. The money from the criminal activity is considered dirty, and the process
“launders” it to look clean. Financial institutions employ anti-money laundering
(AML) policies to detect and prevent this activity.

 Money laundering disguises financial assets without detecting the illegal activity that
produced them.
 Online banking and cryptocurrencies have made it easier for criminals to transfer and
withdraw money without detection.
 The prevention of money laundering has become an international effort that includes
terrorist funding among its targets.
 The financial industry also has its own set of strict anti-money laundering (AML)
measures in place.

Types of Transactions:
 Structuring or Smurfing: Large allotments of illegally obtained cash are divided into
multiple small deposits and spread over many different accounts

 “Mules” or cash smugglers: Cash is smuggled across borders and deposited into
foreign accounts
 Investing in commodities: Using gems and gold that can be moved easily to other
jurisdictions
 Buying and Selling: Using cash for quick turnaround investment in assets such as real
estate, cars, and boats
 Gambling: Using casino transactions to launder money
 Shell companies: Establishing inactive companies or corporations that exist on paper
only

Prevention of money laundering

The Prevention of Money Laundering Act, 2002 (PMLA) in India applies to all financial
institutions, banks, mutual funds, insurance companies, and their financial
intermediaries. The act aims to combat money laundering and provides for confiscation of
property derived from or involved in money laundering. Banks play a crucial role in
preventing money laundering by adhering to KYC guidelines and anti-money laundering
standard.
According to the United Nations Office on Drugs and Crime, global money-laundering
transactions account for roughly $800 billion to $2 trillion annually, or 2% to 5% of
global gross domestic product (GDP).1In 1989, the Group of Seven (G-7) formed an
international committee called the Financial Action Task Force (FATF) to fight money
laundering on an international scale. In the early 2000s, its purview was expanded to include
terrorist activity.

The United States passed the Bank Secrecy Act in 1970, requiring financial institutions to
report cash transactions above $10,000 or unusual activity on a suspicious activity report
(SAR) to the Department of the Treasury.32 This information is used by the Financial Crimes
Enforcement Network (FinCEN) to be shared with domestic criminal investigators,
international bodies, or foreign financial intelligence units.
Money laundering was deemed illegal in the United States in 1986, with the passage of the
Money Laundering Control Act. After Sept. 11, 2001, the USA Patriot Act expanded money
laundering efforts. The Association of Certified Anti-Money Laundering Specialists (ACAMS)
offers a professional designation known as a Certified Anti-Money Laundering Specialist
(CAMS). These individuals work as brokerage compliance managers, Bank Secrecy Act
officers, financial intelligence unit managers, surveillance analysts, and financial crimes
investigative analysts.

The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal
framework put in place by India to combat money laundering. PMLA and the Rules notified
there under came into force with effect from July 1, 2005 . Director, FIU-IND and Director
(Enforcement) have been conferred with exclusive and concurrent powers under relevant
sections of the Act to implement the provisions of the Act.

The PMLA and rules notified thereunder impose obligation on banking companies, financial
institutions, and intermediaries and persons carrying on a designated business or profession,
to verify identity of clients, maintain records and furnish information to FIU-IND. PMLA is an
act to prevent money-laundering and to provide for confiscation of property derived from,
or involved in, money-laundering and for matters connected therewith or incidental thereto.