In 1913, when a good number of industrial houses failed, a demand for the regulation of banking business in our country was raised. A scheme for the regulation of banking companies was recommended by the Central Banking Enquiry Committee which was set-up in 1913. But some special provisions relating to banking companies were incorporated in the Indian Companies Act, 1913, not until 1936, although the said provisions were found to be inadequate to protect the interest of the depositors.
As a result, banking companies are governed by the Banking Regulation Act, 1949, which actually came into force on 16th March 1949. This Act, of course, has been amended several times. The Companies Act, 1956, however, is also applicable to banking companies since it is not inconsistent to the provision of the Banking Regulation Act.
(According to Sec. 5A, the provisions of Banking Regulation Act override any contrary provisions contained in the Memorandum and Articles of Association of a banking company or in any agreement made by it or in any resolution passed by it or by its Board of Directors.)
According to Sec. 5 of the Banking Regulation Act, 1949, a banking company means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawn by Cheque, Draft, and Order or otherwise. In short, a banking company means and includes any company which carries on the business or which transacts the business of banking in India.
Therefore, any company which is engaged in trade or manufacture, which accepts deposits of money from the public for the purpose of financing its business only, shall not be deemed to carry on the business of banking.
No company can use as part of its name any of the words bank, banker or banking other than a banking company and, at the same time, no company can carry on business of banking in India unless and until it uses at least one of such words as part of its name.
Sec. 8 states that a banking company cannot deal directly or indirectly in buying or selling or banking of goods except of its legitimate banking business.
A banking company cannot also form a subsidiary company except for the purpose of undertaking and executing trusts, trustee or otherwise and providing of safe deposit vaults, or carry on business of banking exclusively outside India or such other purposes as are incidental to the business of banking if the Reserve Bank grants a written permission.
Licencing of Banking Companies:
According to Sec. 22, no company shall carry on banking business in India unless it holds a licence issued by the Reserve Bank of India.
If the following conditions art satisfied, the Reserve Bank of India may grant a license:
(i) “That the company is or will be in a position to pay its present and future depositors in full as their claims accrue;
(ii) That the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interests of its present or future depositor;
(iii) That, in the case of a foreign banking company, the carrying on of a banking business by such company in India will be in the public interest, that the Government or law of the country of its origin does not discriminate against Indian banking companies carrying on business in that country, and that it complies with all the requirements of law applicable to it”.
Cancellation of Licence:
The Reserve Bank of India may cancel a licence if:
(i) The company ceases to carry on banking business in India;
(ii) The company at any time fails to comply with any of the conditions on which the licence was granted; or
(iii) At any time, any of the conditions, on the satisfaction of which the Reserve Bank of India granted the licence, has not been fulfilled.
Restrictions on Business:
Sec. 6 of the Act lays down that the following business may also be carried on by a banking company, in addition to the usual banking business:
(a) Acting as agents for any governments or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent of a company;
(b) Contracting for public and private loans and negotiating and issuing the same;
(c) Selecting, insuring, guaranteeing, underwriting, participating, in managing and carrying out of any issue, public or private, of state, municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and of lending of money for the purpose of any such issue;
(d) Carrying on and transacting every kind of guarantee and indemnity business;
(e) Managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims;
(f) Acquiring or holding and generally dealing with any property, or title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;
(g) Undertaking and executing trusts;
(h) Undertaking the administration of estates as executor, trustee or otherwise;
(i) Establishing and supporting associations, institutions, funds, trusts, and convenience for the benefit of employees, ex-employees, their dependants and the general public;
(j) Acquiring, constructing, maintaining and altering any building or works necessary for the purpose of the banking company;
(k) Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing-off or turning into account or otherwise dealing with all or any part of the property and rights of the company;
(l) Acquiring and undertaking the whole or any part of the business of any person or company when such business is of a nature enumerated or described in Sec. 6.
(m) Doing such other things as are necessary for the efficient conduct of the above-named business, such as acquisition, construction, alteration etc. of any building or works necessary or convenient for the purpose of the company; and
(n) Any other form of business which the Central Govt. may notify in the Official Gazette.
As such, other types of business are prohibited by a banking company.
Books Maintained by a Bank:
The methods of preparation and presentation of Profit and Loss Account and a Balance Sheet of a Bank are very important and significant which include certain peculiar terms to this type of organisation. For this purpose, a short description of different books, ledgers, registers and terms which are very important are discussed hereunder.
For recording different types of cash transactions two types of cash books are recorded, viz.:
(i) Rough Cash Book:
Rough Cash Book which deals with cash receipts and cash payments maintained by a receiving cashier and paying cashier, respectively. It records serial number, depositor’s name, amount received etc. in cash, whereas, in case of cash payment, serial number, payee’s name, amount paid, number of token etc. are recorded.
(ii) A Fair Cash Book:
A Fair Cash Book, on the other hand, is one when a separate- person, after receiving the above information from the paying and receiving cashier, records the transactions in a separate book. Naturally, the transaction of the fair cash book must tally with the sum total of the above two rough cash books.
The cash balance at the close of the day is written in the book which is duly signed by the cashier and the manager.
It records day-to-day transactions of the book relating to cash transfers, dealings etc. Besides the above, Received Waste Book, Sectional Cash Book etc. are also to be maintained.
Ledger and Register Sections:
Current Account Ledger:
It records the transactions of those customers who open current account. Generally, the bank does not pay interest on the balance of this account but a nominal charge is taken by the bank for rendering the services. If there are many current accounts, those are to be serially numbered.
Savings Bank Ledger:
It records the transactions of those customers who open savings account in a bank. The detailed description of the customer, viz., name, address, occupation, are recorded along with an account number. If there are many Savings Account ledgers, they are to be serially numbered.
Fixed Deposit Ledger:
It contains transactions of those customers who have deposited their money into the bank for a fixed period. Generally, at the top of the account, depositor’s name and address, rates of interest, period of deposit, the amount so deposited etc. are to be recorded.
It is actually the key ledger of the accounting system of a bank. It contains a total amount in respect of total Current Accounts, total Savings Bank Account, total Loans Account, total Bills Payable Account, total Expenses and total Revenue Accounts. Each ledger is kept under self-balancing system. A trial balance can easily be prepared which helps to prepare the final account as well.
Besides the above ledgers overdue fixed deposit ledger, fixed deposit interest ledger, loan ledger, investment ledger may also be prepared.
The register section includes: Bills for Collection Register, Securities Register, Document Register, Standing Order Register, Cheques Dishonoured Register, Drafts Issue Register, Drafts Payable Register, D.D. Register, Foreign Letters of Credit Register etc.
The Slip System of Ledger Posting:
It is a method of rapid posting in books maintained under Double Entry principle. Under this system, posting is done from slips and not from journals or cash books. Slips are loose leaves of journals and these are supplied either by the customers or by the bank staff. It becomes necessary for a bank to know the position of its individual customer’s account at any time and to see that the transactions are recorded as soon as they take place.
The same is not actually possible if transactions are recorded in bound books. So, original cheques and paying-in-slips are used as vouchers. Consequently, the cashier, for this purpose, credits cash account for receiving cheques and it passes on to the ledger-keeper concerned for debiting the customer’ accounts.
On the contrary, for paying-in-slips the cashier debits cash account and passes on the same to the ledger-keeper concerned, for crediting the customers’ accounts. In this way, the Double Entry posting is completed. The transactions which are not covered by original slips are posted by means of ‘dockets’ which is made out by the bank staff. These are used for posting purposes.
The advantages of this system are:
(i) It reduces the possibility of errors and frauds;
(ii) It saves a lot of time since it is prepared by the customers themselves;
(iii) It provides a good system of internal check etc.
The system is also not free from snags. It suffers from the risk of loss, misappropriation or destruction of slips since they are loose.
Principal Provisions of Banking Regulation Act:
Prohibition of Trading (Sec. 8):
According to Sec. 8 of the Banking Regulation Act, a banking Company cannot directly or indirectly deal in buying or selling or bartering of goods. But it may, however, buy, sell or barter the transactions relating to bills of exchange received for collection or negotiation.
Non-banking Assets (Sec. 9):
According to Sec. 9 “A banking company cannot hold any immovable property, howsoever acquired, except for its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal”. Of course, the Reserve Bank of India may, in the interest of depositors, extend the period of seven years by any period not exceeding five years.
Management (Sec. 10):
Sec. 10(a) states that not less than 51% of the total number of members of the Board of Directors of a banking company shall consist of persons who have special knowledge or practical experience in one or more of tie following fields:
(b) Agriculture and Rural Economy;
(h) Small Scale Industry.
The Section also states that at least not less than two directors should have special knowledge or practical experience relating to agriculture and rural economy and cooperation. Sec. 10(b)(1) further states that every banking company shall have one of its directors as Chairman of its Board of Directors.
Minimum Capital and Reserves (Sec. 11):
Sec. 11 of the Banking Regulation Act, 1949, provides that no banking company shall commence or carry on business in India, unless it has minimum paid-up capital and reserve of such aggregate value as is noted below:
(a) Foreign Banking Companies:
In case of banking company incorporated outside India, its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in Mumbai or Calcutta or in both, Rs. 20 lakhs. It must deposit and keep with the R.B.I, either in Cash or in unencumbered approved securities (i) the amount as required above, and (ii) after the expiry of each calendar year, an amount equal to 20% of its profits for the year in respect of its Indian business.
(b) Indian Banking Companies:
In case of an Indian banking company, the sum of its paid-up capital and reserves shall not be less than the amount stated below:
(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of business is in Mumbai or Calcutta or in both, Rs. 10 lakhs.
(ii) If it has all its places of business in one State, none of which is in Mumbai or Calcutta, Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in respect of each of its other places of business in the same district in which it has its principal place of business plus Rs. 25,000 in respect of each place of business elsewhere in the State. No such banking company shall be required to have paid-up capital and reserves exceeding Rs. 5 lakhs and no such banking company which has only one place of business shall be required to have paid-up capital and reserves exceeding Rs. 50,000. In case of any such banking company which commences business for the first time after 16th September 1962, the amount of its paid-up capital shall not be less than Rs. 5 lakhs.
(iii) If it has all its places of business in one State, one or more of which are in Mumbai or Calcutta, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai or Calcutta. No such banking company shall be required to have paid-up capital and reserve excluding Rs. 10 lakhs.