Business of Banking, Functions, Licensing of Banks

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The business of banking in India is governed by Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934. As per Section 5(c) of the Banking Regulation Act, 1949 a “Banking Company” means any company which transacts the business of banking in India. As per Section 5(b) of the Banking Regulation Act, 1949, “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

business of banking

Broad Functions of Banks in India

The bank performs following functions:

  • Accepting Deposits or savings functions from customers or public by providing bank account, current account, fixed deposit account, recurring accounts etc
  • The payment transactions like lending money to the public. Bank provides an effective credit delivery system for loanable transactions
  • Provide the facility of transferring of money from one place to another place. For performing this operation, bank issues demand drafts, banker’s cheques, money orders etc. for transferring the money.
  • A bank also provides the safe custody facility to the money and valuables of the general public. For keeping valuables bank provides locker facility. The lockers are small compartments with dual locking system built into strong cupboards. These are stored in the bank’s strong room and are fully secured
  • Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the government disbursements like pension payments and tax refunds also take place through bank

Licensing of Banks in India

The Section 22 of Banking Regulation Act articulates that to carry out business of banking in India, one has to take license from Reserve Bank of India

Permitted Business of Banking in India

In addition to the business of banking, a banking company may engage in any one or more of the following forms of business:

  • The borrowing, raising, or taking up of money
  • The lending or advancing of money either upon or without security
  • The drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundies, 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, traveller’s cheques and circular notes
  • the buying, selling and dealing in bullion and specie
  • the buying and selling of foreign exchange including foreign bank notes
  • the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, 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
  • acting as agents for any Government or local authority
  • contracting for public and 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, of State, 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
  • carrying on and transacting every kind of guarantee and indemnity business
  • 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
  • acquiring and holding and generally dealing with any property or any right, 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
  • undertaking and executing trusts
  • undertaking the administration of estates as executor, trustee or otherwise
  • establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons
  • granting pensions and allowances and making payments towards insurance
  • the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company
  • selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company
  • doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company
  • any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage

Prohibited business for banks in India

Section 8 of Banking Regulation Act prohibits banks from engaging activity of trading and associated risks. However it can do such buying or selling in connection:

  • with bills of exchange received for collection or negotiation
  • undertaking the administration of estates as executor, trustee

Read Next: Constitution of Banks

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