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."
Most of the Banking activities are derived from the above definition. Apart from the activity of accepting and lending money, banks are allowed to perform certain activities which are supplementary to this business of accepting deposits and lending, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank's relationship with the public revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money - both domestic and foreign - from one place to another. This process is generally known as "remittance business" in banking phrase. Forex (foreign exchange) business is largely a part of remittance although it involves buying and selling of foreign currencies.
In short, a banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money, it is an institution where one can deposit and borrow money and take care of financial affairs.
The first modern bank, named Bank of St. George was founded in Italy in Genoa in 1406.
Banking law is based on the analysis of the relationship between the bank and the customer. The definition of a customer is any person for whom the bank agrees to conduct an account.
A bank is defined as "a commercial institution licensed as a receiver of deposits and giver of loans, both short and long term"
A banking company is defined as, "any company which transacts the business of banking in India."
Functioning of a Bank is among the more problematical of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather strictly. In India, the regulation traditionally has been very strict and at the same time NPAs are also of a very high order. The process of financial reforms, which started in 1991, has cleared the staleness but a lot remains to be done. The large number of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on illogical. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise."The law governing Banking Activities in India is called as "Negotiable Instruments Act 1881". Following are the major activities of banks :
Banking Regulation Act prohibits banks from performing some activities. Banks are not allowed to do such activities, they are :
Banking companies have the right to set up a subsidiary company of their own for the purpose of doing any business that is permitted to the banking company. But they have to obtaining the prior approval of the RBI.
A bank can set up a subsidiary company only for carrying out limited activities, such as :
A Bank Account is the record of financial relationship between the customer and the Bank. It contains details of all the moneys deposited with the Bank and withdrawn from it.
The law implies rights and obligations into the relationship between the customer and the Bank as follows :
These implied contractual terms may be changed by express agreement between the customer and the bank. The statutes and regulations in force in the authority may also modify the above terms and/or create new rights, obligations or limitations relevant to the bank-customer relationship.
In India almost 80% of the banking business is under the control of Public Sector Banks (PSB). PSBs are still dominating the Indian commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges.
The Reserve bank of India (RBI) has given licenses to new private sector banks as part of the liberalization process. The RBI has also been granting licenses to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, small business retail trade and agricultural finance.
The PSBs are playing an important role in the industry due to its number of branches and foreign banks facing the limitation of limited number of branches. Hence, in order to achieve an efficient banking system, the responsibility is on the Government to encourage the PSBs to be run on professional lines.
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