Unit 1: Some Relevant Provisions of The Banking Regulations Act, 1949: Notes | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 
BANKING 
COMPANIES 
 
 
 
Banks are vital to the prosperity and well-being of any society or country. Banks 
enable a society to create the platform for the satisfaction of wants of its people 
by managing and maintaining the flow of money to carry out transactions. 
For smoothly meeting cash payment requirement, banks have to maintain Cash 
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). 
The capital adequacy norms given in this unit are as per existing Basel II norms. The 
RBI requires Banks to maintain minimum capital risk adequacy ratio at prescribed 
rate on an ongoing basis.  
Capital is divided into two tiers according to the characteristics/qualities of each 
qualifying instrument.  Tier I capital consists mainly of share capital and disclosed 
reserves and it is a bank’s highest quality capital because it is fully available to cover 
losses. Tier II capital on the other hand consists of certain reserves and certain types 
of subordinated debt. 
The Banks have to classify their advances into two broad groups: 1. Performing 
Assets; 2. Non-Performing Assets. These classification is done based on the 
principle laid down by the RBI in Income Recognition and Asset Classification (IRAC) 
norms.  
 
CHAPTER 
8 
Page 2


 
 
 
BANKING 
COMPANIES 
 
 
 
Banks are vital to the prosperity and well-being of any society or country. Banks 
enable a society to create the platform for the satisfaction of wants of its people 
by managing and maintaining the flow of money to carry out transactions. 
For smoothly meeting cash payment requirement, banks have to maintain Cash 
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). 
The capital adequacy norms given in this unit are as per existing Basel II norms. The 
RBI requires Banks to maintain minimum capital risk adequacy ratio at prescribed 
rate on an ongoing basis.  
Capital is divided into two tiers according to the characteristics/qualities of each 
qualifying instrument.  Tier I capital consists mainly of share capital and disclosed 
reserves and it is a bank’s highest quality capital because it is fully available to cover 
losses. Tier II capital on the other hand consists of certain reserves and certain types 
of subordinated debt. 
The Banks have to classify their advances into two broad groups: 1. Performing 
Assets; 2. Non-Performing Assets. These classification is done based on the 
principle laid down by the RBI in Income Recognition and Asset Classification (IRAC) 
norms.  
 
CHAPTER 
8 
  
 
8.2 ADVANCED ACCOUNTING 
Performing assets are also called as Standard Assets. The Non-Performing Assets 
is again classified into three groups and they are (i) sub-standard Assets (ii) 
doubtful assets & (iii) Loss Assets. 
The banks have to maintain provisioning for Non-Performing Assets at the 
prescribed rates. A banking company also performs Discounting of bills; Collection 
of bills and Acceptances on behalf of customers 
While preparing financial statements, banks have to follow various gui delines / 
directions given by RBI/Government of India governing the Financial Statements.  
The chapter has been divided into 6 units for the purpose of convenience in 
understanding of the topic.  
  
Page 3


 
 
 
BANKING 
COMPANIES 
 
 
 
Banks are vital to the prosperity and well-being of any society or country. Banks 
enable a society to create the platform for the satisfaction of wants of its people 
by managing and maintaining the flow of money to carry out transactions. 
For smoothly meeting cash payment requirement, banks have to maintain Cash 
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). 
The capital adequacy norms given in this unit are as per existing Basel II norms. The 
RBI requires Banks to maintain minimum capital risk adequacy ratio at prescribed 
rate on an ongoing basis.  
Capital is divided into two tiers according to the characteristics/qualities of each 
qualifying instrument.  Tier I capital consists mainly of share capital and disclosed 
reserves and it is a bank’s highest quality capital because it is fully available to cover 
losses. Tier II capital on the other hand consists of certain reserves and certain types 
of subordinated debt. 
The Banks have to classify their advances into two broad groups: 1. Performing 
Assets; 2. Non-Performing Assets. These classification is done based on the 
principle laid down by the RBI in Income Recognition and Asset Classification (IRAC) 
norms.  
 
CHAPTER 
8 
  
 
8.2 ADVANCED ACCOUNTING 
Performing assets are also called as Standard Assets. The Non-Performing Assets 
is again classified into three groups and they are (i) sub-standard Assets (ii) 
doubtful assets & (iii) Loss Assets. 
The banks have to maintain provisioning for Non-Performing Assets at the 
prescribed rates. A banking company also performs Discounting of bills; Collection 
of bills and Acceptances on behalf of customers 
While preparing financial statements, banks have to follow various gui delines / 
directions given by RBI/Government of India governing the Financial Statements.  
The chapter has been divided into 6 units for the purpose of convenience in 
understanding of the topic.  
  
 
 
 8.3 
 
BANKING COMPANIES 
 
LEARNING OUTCOMES 
UNIT 1: SOME RELEVANT PROVISIONS OF THE  
           BANKING REGULATIONS ACT, 1949 
 
 
 
 
After studying this unit, you will be able to: 
? Understand the legal definition of banking, the composition of 
management team of a bank and types of banks operating in 
India. 
? Learn the conditions to be fulfilled for obtaining a license for 
banking activities in India. 
? Learn the provisions relating to capital, reserve, liquidity norm 
(Capital Reserve Ratio & Statutory Liquidity Ratio), reserve fund 
and dividend payment. 
? Try to relate such provisions with the financial information 
obtained from any banking companies. 
Page 4


 
 
 
BANKING 
COMPANIES 
 
 
 
Banks are vital to the prosperity and well-being of any society or country. Banks 
enable a society to create the platform for the satisfaction of wants of its people 
by managing and maintaining the flow of money to carry out transactions. 
For smoothly meeting cash payment requirement, banks have to maintain Cash 
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). 
The capital adequacy norms given in this unit are as per existing Basel II norms. The 
RBI requires Banks to maintain minimum capital risk adequacy ratio at prescribed 
rate on an ongoing basis.  
Capital is divided into two tiers according to the characteristics/qualities of each 
qualifying instrument.  Tier I capital consists mainly of share capital and disclosed 
reserves and it is a bank’s highest quality capital because it is fully available to cover 
losses. Tier II capital on the other hand consists of certain reserves and certain types 
of subordinated debt. 
The Banks have to classify their advances into two broad groups: 1. Performing 
Assets; 2. Non-Performing Assets. These classification is done based on the 
principle laid down by the RBI in Income Recognition and Asset Classification (IRAC) 
norms.  
 
CHAPTER 
8 
  
 
8.2 ADVANCED ACCOUNTING 
Performing assets are also called as Standard Assets. The Non-Performing Assets 
is again classified into three groups and they are (i) sub-standard Assets (ii) 
doubtful assets & (iii) Loss Assets. 
The banks have to maintain provisioning for Non-Performing Assets at the 
prescribed rates. A banking company also performs Discounting of bills; Collection 
of bills and Acceptances on behalf of customers 
While preparing financial statements, banks have to follow various gui delines / 
directions given by RBI/Government of India governing the Financial Statements.  
The chapter has been divided into 6 units for the purpose of convenience in 
understanding of the topic.  
  
 
 
 8.3 
 
BANKING COMPANIES 
 
LEARNING OUTCOMES 
UNIT 1: SOME RELEVANT PROVISIONS OF THE  
           BANKING REGULATIONS ACT, 1949 
 
 
 
 
After studying this unit, you will be able to: 
? Understand the legal definition of banking, the composition of 
management team of a bank and types of banks operating in 
India. 
? Learn the conditions to be fulfilled for obtaining a license for 
banking activities in India. 
? Learn the provisions relating to capital, reserve, liquidity norm 
(Capital Reserve Ratio & Statutory Liquidity Ratio), reserve fund 
and dividend payment. 
? Try to relate such provisions with the financial information 
obtained from any banking companies. 
  
8.4 ADVANCED ACCOUNTING 
 1.1  MEANING OF BANKING 
Banks are vital to the prosperity and well-being of any society or country. Banks 
enable a society to create the platform for the satisfaction of wants of its people 
by managing and maintaining the flow of money to carry out transactions. The role 
of banks may be likened to the heart in a human being, circulating and managing 
money through the economy, thereby playing a crucial role for its good health. 
Banks in India and their activities are regulated by the Banking Regulation Act, 
1949.  
Banking: Under Section 5(b) of the said Act “Banking” means,  
? Accepting deposits of money from public for the purpose of lending or 
investing 
? These deposits are repayable on demand or otherwise, and can be withdrawn 
by cheque, draft or otherwise. 
Banking Company: Any bank which transacts this business as stated in section 5 
(b) of the act in India is called a banking company. However merely accepting public 
deposits by a company for financing its own business shall not make it a bank.It 
may be mentioned that the Banking Regulation Act, 1949 is not applicable to a 
primary agricultural society, a co-operative land mortgage bank and any other co-
operative society. 
1.1.1 Types of banks 
There are two main categories of Commercial Bank in India namely:- 
1. Scheduled Commercial Bank 
2. Scheduled Co-operative Bank 
Scheduled Commercial Banks are again divided into five types and the Scheduled 
Co-operative Banks into two as given in the following chart. 
  
Page 5


 
 
 
BANKING 
COMPANIES 
 
 
 
Banks are vital to the prosperity and well-being of any society or country. Banks 
enable a society to create the platform for the satisfaction of wants of its people 
by managing and maintaining the flow of money to carry out transactions. 
For smoothly meeting cash payment requirement, banks have to maintain Cash 
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). 
The capital adequacy norms given in this unit are as per existing Basel II norms. The 
RBI requires Banks to maintain minimum capital risk adequacy ratio at prescribed 
rate on an ongoing basis.  
Capital is divided into two tiers according to the characteristics/qualities of each 
qualifying instrument.  Tier I capital consists mainly of share capital and disclosed 
reserves and it is a bank’s highest quality capital because it is fully available to cover 
losses. Tier II capital on the other hand consists of certain reserves and certain types 
of subordinated debt. 
The Banks have to classify their advances into two broad groups: 1. Performing 
Assets; 2. Non-Performing Assets. These classification is done based on the 
principle laid down by the RBI in Income Recognition and Asset Classification (IRAC) 
norms.  
 
CHAPTER 
8 
  
 
8.2 ADVANCED ACCOUNTING 
Performing assets are also called as Standard Assets. The Non-Performing Assets 
is again classified into three groups and they are (i) sub-standard Assets (ii) 
doubtful assets & (iii) Loss Assets. 
The banks have to maintain provisioning for Non-Performing Assets at the 
prescribed rates. A banking company also performs Discounting of bills; Collection 
of bills and Acceptances on behalf of customers 
While preparing financial statements, banks have to follow various gui delines / 
directions given by RBI/Government of India governing the Financial Statements.  
The chapter has been divided into 6 units for the purpose of convenience in 
understanding of the topic.  
  
 
 
 8.3 
 
BANKING COMPANIES 
 
LEARNING OUTCOMES 
UNIT 1: SOME RELEVANT PROVISIONS OF THE  
           BANKING REGULATIONS ACT, 1949 
 
 
 
 
After studying this unit, you will be able to: 
? Understand the legal definition of banking, the composition of 
management team of a bank and types of banks operating in 
India. 
? Learn the conditions to be fulfilled for obtaining a license for 
banking activities in India. 
? Learn the provisions relating to capital, reserve, liquidity norm 
(Capital Reserve Ratio & Statutory Liquidity Ratio), reserve fund 
and dividend payment. 
? Try to relate such provisions with the financial information 
obtained from any banking companies. 
  
8.4 ADVANCED ACCOUNTING 
 1.1  MEANING OF BANKING 
Banks are vital to the prosperity and well-being of any society or country. Banks 
enable a society to create the platform for the satisfaction of wants of its people 
by managing and maintaining the flow of money to carry out transactions. The role 
of banks may be likened to the heart in a human being, circulating and managing 
money through the economy, thereby playing a crucial role for its good health. 
Banks in India and their activities are regulated by the Banking Regulation Act, 
1949.  
Banking: Under Section 5(b) of the said Act “Banking” means,  
? Accepting deposits of money from public for the purpose of lending or 
investing 
? These deposits are repayable on demand or otherwise, and can be withdrawn 
by cheque, draft or otherwise. 
Banking Company: Any bank which transacts this business as stated in section 5 
(b) of the act in India is called a banking company. However merely accepting public 
deposits by a company for financing its own business shall not make it a bank.It 
may be mentioned that the Banking Regulation Act, 1949 is not applicable to a 
primary agricultural society, a co-operative land mortgage bank and any other co-
operative society. 
1.1.1 Types of banks 
There are two main categories of Commercial Bank in India namely:- 
1. Scheduled Commercial Bank 
2. Scheduled Co-operative Bank 
Scheduled Commercial Banks are again divided into five types and the Scheduled 
Co-operative Banks into two as given in the following chart. 
  
 
 
 8.5 
 
BANKING COMPANIES 
 
 
 
 
 
 
Scheduled Banks in India constitute those banks which have been included in the 
Second Schedule of Reserve Bank of India(RBI) Act, 1934. After May 1997 there are 
no non-scheduled commercial banks existing in India. However, there are small to 
tiny non-scheduled Urban Co-operative Banks also known as Nidhi ond Schedule 
ots of the country. 
The banks included in this schedule list should fulfil following two conditions:  
1.  The paid up capital and reserves in aggregate should not be less than ` 5 
lakhs.  
2. Any activity of the bank will not adversely affect the interests of depositors. 
The Reserve Bank includes a bank in this schedule if it fulfils certain other conditions 
too. 
Scheduled Commercial Banks
Nationalised Bank eg. BOB, 
SBI*
Development Bank eg. 
NABARD, EXIM
Regional Rural Bank 
(Gramin Bank)**
Foreign Banks e.g. CITI 
Bank, BNP Paribas
Private Sector Bank e.g. 
ICICI, Axis
Scheduled Co-operative Bank
Scheduled State Co-
operative Bank
Scheduled Urban Co-
operative Bank
Types of Bank