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Submitted 2008-07-14 00:38:00

Banking Questions Part 1

Banking

What is a Bank?
·        A bank is defined as a commercial institution licensed as a receiver of deposits and giver of loans – both short and long term
•      Section 5(1)(b) of the Banking Regulation Act, 1949 defines banking as, “the accepting for the purpose of lending or investment, of deposits from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.”
•      Section 5(1)( c) defines a banking company as, “any company which transacts the business of banking in India.”
Banking involves therefore:
•      The borrowing, raising or taking up of money;
•      The lending or advancing of money either with or without security;
•      The drawing, making, accepting, discounting buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not;
•      The granting and issuing of letters of credit, travelers’ cheques and circulars notes;
•      The buying and selling of foreign exchange including bank notes;
•      The buying and selling of bullion and specie;
•      The acquiring, holding, issuing on commission, underwriting and dealing in stocks, funds, shares, debentures, bonds, obligations, securities and investments of all kinds;
•      The purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances;
•      The receiving of all kinds of bonds or valuables on deposit or for safe custody or otherwise;
•      The providing of safe deposit vaults;
•      The collecting and transmitting of money and securities;
•      Carrying on and transacting every kind of guarantee and indemnity business;
•      Managing, selling and realizing any 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;
•      Acting as agents for any government or local authority or any other person or persons;
•      Contracting for public or private loans and negotiating and issuing the same;
•      The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;
•      Undertaking and executing trusts;
•      Undertaking the administration of estates as executor, trustee or otherwise;
•      Establishing, supporting and aiding institutions funds, trusts etc. for the benefit of its present employees and granting money for charitable purposes;
•      Acquiring, constructing and maintaining any building for its own purpose;
•      Selling, improving, managing, developing, exchanging, leasing, mortgaging or disposing its property;
•      Doing all such things that are incidental or conducive to the promotion or advancement of its business;
•      Doing all other business specified by the Central Government as the lawful business of a banking company. Leasing and factoring has been specified as permissible for banks by the Central Government.

Prohibited Activities
There are some activities banks are not allowed to do.
The Banking Regulation Act prohibits banks from:
•       Engaging directly or indirectly in trading activities and undertaking trading risks.
•       Buying or selling or bartering of goods directly or indirectly. However, a bank can realize securities given to it or held by it for a loan, if need arises for the realization of the amount lent.
•       Any activity that may be in direct conflict with their other work. This includes acting as brokers on the stock exchange or in the money market or in trading goods.
•       Engaging on its own account alone or with others in wholesale or retail trade including import or export trade.
•       Acquiring or purchasing any immovable property or any interest except as necessary for the purpose of conducting its business or of housing or providing amenities for its staff or for its own use. Otherwise it should not be held for more than seven years. This period may be extended by the Reserve Bank by another five years if it is satisfied that this extension is in the interest of the depositors.
•      Acquiring or holding any part of the share capital of, or otherwise have a direct interest in any financial, commercial, agricultural or other undertaking.
•      Engaging in any trade or buying, selling or bartering of goods for others except in connection with undertaking the administration of estates as executor, trustee or otherwise.
•      Holding shares in any company whether as pledgee or mortgagee or absolute owner of an amount exceeding 30 percent of the paid up capital of that company or 30 percent of its own share capital and reserves whichever is less.
•      Investing in a subsidiary company, financial services company, financial institution, stock or other exchange where the investment exceeds 10 percent of the bank’s paid up capital and reserves. Investment in all such companies should not exceed 20 percent of the bank’s paid up capital and reserves.
•      Participating in equity of financial services ventures including stock exchanges without obtaining the prior approval of RBI.

Subsidiary
Banking companies may form a subsidiary company, after obtaining the prior approval of the RBI for:
•      Undertaking of any business permitted for a banking company.
•      Carrying on the business of banking exclusively outside India
•      Undertaking of such businesses which, in the opinion of the Reserve Bank, would be conducive to the spread of banking in India
•      Transacting leasing business and or investing in shares of equipment leasing companies

Services rendered by banks
•      Acceptance of deposits;
•      Provision of credit;
•      Collection of cheques, demand drafts, bills of exchange, promissory notes, hundis and foreign documentary and clean bills;
•      Purchase of local and foreign currency documentary/ clean bills, negotiation of bills under inland and foreign letters of credit, advising of inland and foreign letters of credit established by branches and correspondents;
•      Carrying out standing instructions for payments;
•      Issuance of performance and financial guarantees;
•      Keeping in safe custody deeds and securities;
•      Purchase and sale of securities;
•      Remittance of funds;
•      Collection of interest on securities, dividend on shares and collection of bills;
•      Credit transfers;
•      Issue of travelers cheques and gift cheques;
•      Acting as executors and trustees;
•      Issuance of credit cards;
•      Underwriting, acting as bankers to new issues and as bankers for refunds.

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Question Popularity: Submitted 2008-07-14 00:38:00

Question Popularity:
Submitted 2008-07-14 00:38:00