Topic 8

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

• Banking Regulation Act 1949: Main banking legislation; gives RBI power to license banks, set CRR/SLR, inspect banks, issue directions; Section 35A: RBI can give directions in public interest
• RBI Act 1934: Governs RBI’s functions; MPC, monetary policy, currency issue, FEMA provisions
• SARFAESI Act 2002: Enables banks to recover NPAs without court intervention; can take possession and sell secured assets
• DRT Act 1993: Debt Recovery Tribunal; hears cases where debt exceeds ₹20 lakh; faster than civil courts
• FRBM Act 2003: Fiscal Responsibility and Budget Management; mandated fiscal deficit < 3% of GDP; revenue deficit to zero
• ⚡ PMLA (Prevention of Money Laundering Act, 2002): Banks must maintain KYC, CTR, suspicious transaction reports; non-compliance is criminal offence

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Important Indian Acts and Reforms

For the SBI PO exam, a thorough understanding of the legislative framework governing banking and finance is essential. This topic covers the key Acts, their provisions, and their impact on the banking sector.

Banking Regulation Act 1949

Historical Background

Originally called the Banking Companies Act, 1949. Passed after bank failures in the 1940s. Became the Banking Regulation Act in 1966.

Key Provisions

Section 5(b): Definition of “Banking”

• Accepting deposits of money from the public for the purpose of lending or investment
• Repayable on demand, cheque, draft, or otherwise

Section 6: Forms of business banks may undertake

• Issue of letters of credit, traveller’s cheques
• Collection and payment of crossed cheques
• Bills of exchange, promissory notes
• Acting as correspondents
• Safe custody of valuables
• Safe deposit vaults

Section 10: Board composition requirements

• Minimum 2 directors; no maximum cap (RBI prescribes)
• At least 51% directors must have banking expertise

Section 17: Mandatory transfer of profits

• Minimum 20% of net profits to reserves before dividend
• Transfer of higher percentage when capital is below prescribed level

Section 21: RBI can direct banks on interest rates

• Historically regulated interest rates (withdrawn gradually since 2011)
• RBI still sets savings bank interest rate ceiling

RBI’s Supervisory Powers

Section 35: RBI can inspect any bank (scheduled or non-scheduled)

• On-site inspection and off-site surveillance
• Annual inspection of all scheduled commercial banks

Section 35A: RBI can give directions in public interest

• Broad powers to ensure sound banking practices

Section 36ACA: RBI can supersede board of a bank

• Can remove managing director/CEO
• YES Bank (2020): RBI used this power; appointed an administrator and orchestrated reconstruction with RBI’s safeguards

Prompt Corrective Action (PCA) Framework

Background: RBI introduced PCA framework in 2017 for scheduled commercial banks (excluding RRBs and small finance banks).

Triggers (when banks breach thresholds):

• Capital Ratios: CET1 ratio, Tier 1 capital ratio, Total Capital ratio
• Asset Quality: GNPA ratio, Net NPA ratio
• Profitability: Return on Assets (ROA)

Actions under PCA:

1. Higher provisions: Mandatory provisioning for NPA recognition
2. Restrictions on dividend distribution: Cannot declare dividends
3. Restrictions on branch expansion: No new branches
4. Restrictions on borrowing: Limits on inter-bank borrowings
5. Capital raise requirement: Compulsory capital raise
6. Risk-weighted asset restrictions: No increase in risk-weighted assets

Most stringent: If a bank breaches minimum capital ratios, RBI can supersede the board.

SARFAESI Act 2002

The Securitisation, Reconstruction and Enforcement of Security Interest Act empowers banks to recover NPAs without court intervention.

Key Powers

Section 13 — Enforcement:

• If borrower defaults, bank can issue a Demand Notice requiring repayment within 60 days
• If not repaid, bank can take possession of the secured asset
• Bank can sell the asset without court intervention

Types of Security Interests:

• Mortgage (immovable property)
• Pledge (movable goods)
• Hypothecation (goods, vehicles, machinery)

Other Powers:

• Appointment of Receiver to manage secured asset
• Transfer of NPA accounts to Asset Reconstruction Companies (ARCs)
• Banks can acquire financial assets from other banks/financial institutions

Asset Reconstruction Companies (ARCs)

Registered with RBI under SARFAESI

• Buy NPAs from banks at a discount
• Manage and recover over time
• Example: India Asset Reconstruction Company (IARC), Suraksha Asset Reconstruction Private Limited

Security Receipts (SRs):

• When banks sell assets to ARC, they receive SRs (not cash)
• SRs can be redeemed when ARC recovers from the borrower

DRT vs SARFAESI

Feature	SARFAESI	DRT
Speed	Faster (no court)	Slower (court process)
Approach	Direct action	Legal proceedings
Suitable for	Clear-cut secured assets	Disputed cases
Recovery %	Variable	Variable

Debt Recovery Tribunal (DRT) Act 1993

Structure

• DRT: Adjudicating authority for recovery of debt ≥ ₹20 lakh
• DRAT: Appellate tribunal (against DRT orders)
• Multiple DRTs across India; Benches in major cities

Process

1. Application filed by bank with DRT
2. DRT issues summons to borrower
3. Evidence submitted; hearing held
4. DRT passes Recovery Certificate (RC)
5. Recovery Officer enforces RC (attach and sell property)

FRBM Act 2003

The Fiscal Responsibility and Budget Management Act established fiscal discipline.

Key Provisions

Section 4 — Fiscal Deficit Target:

• Reduce fiscal deficit to 3% of GDP by 2008-09 (not achieved)
• Fiscal deficit to be reduced by at least 0.3% of GDP each year

Section 5 — Revenue Deficit Target:

• Revenue deficit to be eliminated and converted to revenue surplus

Medium-Term Fiscal Policy Statement:

• Government must lay before Parliament: Debt management strategy, fiscal strategy statement

FRBM Review (2020s):

• The 3% target has been considered too restrictive for developing economies
• FRBM review committee recommended allowing fiscal deficit up to 5% of GDP in normal times
• Higher limits during emergencies (COVID)

Prevention of Money Laundering Act (PMLA) 2002

Overview

India’s primary anti-money laundering legislation; came into force 2005.

Key Obligations

Know Your Customer (KYC):

• Banks must verify identity (Aadhaar, PAN)
• Verify address
• Understand nature of customer’s business
• Ongoing due diligence

Customer Due Diligence (CDD):

• Verify beneficial owner (real person behind the entity)
• Enhanced due diligence for high-risk customers

Reporting Requirements:

1. Cash Transaction Report (CTR): Cash transactions ≥ ₹10 lakh (single or aggregate)
2. Suspicious Transaction Report (STR): Any transaction suspected to involve money laundering; filed with FIU-IND
3. Counterfeit Currency Report: For counterfeit note detection
4. Non-Profit Organisation Transactions: For charities/non-profits

Penalty for Non-Compliance:

• Monetary penalty by RBI/FIU
• Criminal prosecution of responsible officers

FIU-IND

Financial Intelligence Unit — India: National agency that receives, analyses, and disseminates financial intelligence to law enforcement agencies.

Negotiable Instruments Act 1881

Key Provisions

Cheque: A bill of exchange drawn on a banker; payable on demand.

Crossing of Cheques:

• General Crossing: Two parallel lines across cheque; payable through any bank
• Special Crossing: Bank name mentioned; payable only to that bank

Types of Crossing:

• Payee’s Account: “A/c Payee” — only depositing in payee’s account
• Not Negotiable: Disclaims endorsement guarantee

Dishonour of Cheques:

• Insufficient funds (Section 138): Criminal offense
• Mismatch of signature: Civil dispute
• Bank must return cheque within 3 days

Criminal Liability under Section 138:

• Complaint to Magistrate within 1 month of cause
• Court can convict; imprisonment up to 2 years or fine or both

Information Technology Act 2000 (Amended 2008)

Key Provisions for Banking

Section 43A: Compensation for failure to protect data

• If a body corporate possessing sensitive data fails to maintain reasonable security practices → liable to pay compensation

Section 72A: Disclosure of information without consent

• Service provider cannot disclose personal information

Section 66: Computer-related offences

• Hacking, unauthorized access, spreading viruses

Section 66E: Violation of privacy

• Publishing/transmitting private area of any person

Digital Signature: Cryptographic authentication of electronic documents (Schedule II)

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Securitisation

Definition: Pooling of financial assets (loans) and converting them into securities that can be sold to investors.

Process:

1. Bank transfers loan portfolio to a Special Purpose Vehicle (SPV)
2. SPV issues Pass-Through Certificates (PTCs) to investors
3. Cash flows from loans (EMIs) go to investors
4. Servicer collects EMIs and passes to SPV

Why Banks Securitise:

• Reduce risk-weighted assets
• Free up capital
• Transfer risk

Insolvency and Bankruptcy Code (IBC) 2016

Framework:

• NCLT (National Company Law Tribunal): Adjudicate corporate insolvency
• IP (Insolvency Professional): Manages debtor company during moratorium
• Committee of Creditors (CoC): Banks vote on resolution plan (requires 66% majority)
• Resolution Plan: Must ensure recovery for creditors

Timeline: 330 days including litigation (extendable by 90 days)

Cases Filed: Over 5,000 corporate insolvency cases since 2016

Recovery Rates: Average ~45-47 paise per rupee admitted

Recent Amendments

Banking Regulation (Amendment) Act 2020:

• RBI’s powers over cooperative banks strengthened
• Can supersede board, remove directors
• Can initiate merger of weak cooperative banks

Banking Laws (Amendment) Act 2023:

• State Bank of India (Subsidiary Banks) Act amendments: Enabled merger of associate banks with SBI
• Additional provisions for bank governance

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