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November 11, 2016

Banking Awareness in Simple Language - Lesson 20

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Dear Gr8 Ambitionists, in our previous Banking Awareness 2017 Lesson 19, we have learnt about Important Banking and Financial Organizations in exam point of view. In today's lesson, we shall learn Important Banking Act. Happy Reading :)

Banking Awareness 2017 : Important Acts


Negotiable Instrument Act, 1881 (NI Act, 1881)

  • Citation : Act no 26 of 1881
  • Date enacted : 9 Dec 1881 
  • Date Commenced : 1 March 1882 
  • An act to define and amend the law relating to promissory notes, Bills of Exchange and cheques. This act extends to whole India d-vrept the state Jammu & Kashmir.
  • Negotiable Instrument 
    • It means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word "Order" or "bearer" on the instrument or not.
  • Promissory Note
    • It is an instrument in writing [note being a bank note or a currency note] containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to, the bearer of the instrument. In promissory note there are two parties : 
    1. Maker (Debtor) 
    2. Payee (Creditor)
  • Bill of Exchange
    • A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. 
    • A bill of exchange, therefore is a written acknowledgment of the debt, written by the creditor and accepted by the debtor. There are usually three parties : drawer, drawee and payee. Drawer himself may be the payee. 
    • Classification of bills
      • Inland & foreign bill 
      • Time and demand bill 
      • Trade & Accommodation bills 
  • Cheques  
    • A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. 
    • A cheque is bill of exchange with two more qualifications. 
      • It is always drawn on a specified banker. 
      • It is always payable on demand.
    • Consequently all cheques are bill of exchange but all bills are not cheque
  •  Hundis
    • A "Hundi' is a negotiable instrument written in an oriental language. The term hundi includes all indigenous negotiable instruments whether they may be in the form of notes or bills. 

RBI Act 1934 

  • Enacted by : Parliament of India
  • Date Enacted : 6 march 1934 
  • Date Commenced : 1 April 1935
  • RBI act, 1934 is the legislative act under which RBI was formed. This act along with the companies act, which was amended in 1936, were meant to provide a framework for the supervision of banking firms in India.
    • The act contains the definition of the so-called scheduled banks, as they are mentioned in the 2nd scheduled of the act. These are banks which were to have paid up capital & reserves above Rs. 500,000.
    • Section 24 states that the maximum denomination a note can be 101000.
    • Section 31 states that in India only the RBI or the central govt. can issue and accept promissory notes that are payable on demand. However, cheque, that are payable on demand, can be issued by anyone.

Banking Regulation Act, 1949

  • It is a legislation in India that regulates all banking firms in India. Initially the law was applicable only to banking companies. But in 1965 it was amended to make it applicable to co-operative banks a ad to introduce other changes.

Consumer Protection Act, 1986

  • It is an act of the parliament of India enacted in 1986 to protect interests of consumers in India. It makes provision for the establishment of consumer councils & other authorities for the settlement of consumer's disputes and for matters connected therewith. This act is not applicable in J & K. This act recognised 6 of the 8 rights of consumer and provided in united nations charter.
  • Consumer Disputes Redressal Agencies 
    • DCDRF (District Consumer Disputes Redressal Forum)
      • It is a district level court that deals with cases valuing up to 2 million.
    • SCDRC (State Consumer disputes Redressal Commission)
      • It is a state level court that takes up cases valuing less than 10 million. 
    • NCDRC (National Consumer disputes Redressal Commission)
      • It is a national level court that works for the whole country and deals with amount more than 10 million.

The Competition Act 2002

  • It was enacted by the parliament of India & governs Indian competition law. It replaced the archaic monopoly and Restrictive Trade Practices Act, 1969. Under this legislation, the competiton commission of India was established to prevent activities that have an adverse effect on competition in India. It is not applicable in J & K in all Industries including Banking
  • Amendments
    • The competition act, 2002 was amended by the competition (amendment) act, 2007 and again by the competition (amendment) act, 2009, An amendment bill introduced in 2006 was withdrawn.
COMPAT (Competition Appellate Tribunal)
  • Set up : 15 May, 2009 
  • Headquarter : New Delhi 
  • Chairman : G.S. Singhvi 
  • The COMPAT is a statutory organisation established under the provision of the competition act 2002, to hear & dispose of appeals against any direction issued or decision or order passed by the competition commission of India.
  • Every appeal should be filled within 60 days from the date on which a copy of direction or decision made by competition commission of India is received. The tribunal may entertain an appeal after expiry period of 60 days if it is satisfied
  • If a person who denys any order of Appellate Tribunal he shall be liable for penalty upto 1 crore or imprisonment for a term upto 3 years or both.
  • Team
    • The appellate tribunal consists, chairperson and 2 members appointed by central govt. Chairperson should be or has been a judge of Supreme Court or chief justice of High court and he is appointed for 5 years and can be reappointed

Sarfaesi Act, 2002

(Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest) 
  • It is an act of Parliament of India and empowers Banks/Financial institutions to recover their non-performing assets without the intervention of the court. 
    • The provision of this act are applicable only for NPA Loans with outstanding above Rs. 1.00 lac. 
    • NPA loan accounts where the amount is less than 20% of the principal & interest are not eligible to deal with under this act. 
    • Law doesn't apply to unsecured loans 
    • This act is not applicable to RRBs
    • This act allows banks and other financial institution to auction residential or commercial properties to recover loans. The first asset reconstruction company (ARC) of India, ARCIL (Assets reconstruction company India Ltd.) was set under this act. 
  • Non-performing assets should be backed by securities charged to the bank by way of hypothecation or mortgage or assignment.
  • SARFAESI Act, 2002 gives power of "Seize and desist" to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply with the Notice, the bank may take recourse to one or more of the following measures : 
    • Take possession of the security for the loan. 
    • Sale or lease or assign the right over the security. 
    • Manage the same or appoint any person to manage the same.

DRT (Debt Recovery Tribunal)

  • These tribunals were established under the Recovery of Debts due to banks and financial institution act, 1993, to deal with the cases of recovery of debts above Rs. 10 lakh due to banks & financial institutions
  • QIB (Qualified Institutional Buyer) 
    • It is financial institution or an insurance company or a bank. It is a state financial corporation or state industrial development corporation or trustee or any asset management company. Making an investment on behalf of a mutual fund or provident fund or gratuity fund or pension fund or a foreign institutional investor, registered under the SEBI act, 1992 or any other body corporate as may be specified by SEBI
    • This definition covers several categories of institutional investors but doesn't include a company registered under the companies act, 1956. If any company wants to become a qualified institutional buyer then it will have to get such a registration from SEBI. 

Money Laundering

  • It is the process of transforming the proceeds of crime into ostensibly legitimate money or other assets. Broadly there are 3 steps to money laundering activity as per the RBI : 
    • Placement : "Placement" refers to the physical disposal of bulk cash proceeds derived from illegal activity.
    • Layering : "Layering" refers to separation of illicit proceeds from their source by creating complex layers of financial transactions. Layering conceals the audit trail & provides anonymity.
    • Integration : "Integration" refers to the re-injection of the laundered proceeds back into the economy in such a way that they re-enter the financial system as normal business funds.

Anti-Money Laundering (AML)

It is a term mainly used in the financial & legal industries to describe the legal controls that require financial institutions & other regulated entities to prevent, detect, report money-laundering activities. 

Prevention of Money Laundering Act, 2002

  • It is an act of the parliament of India, enacted to prevent money-laundering. The act was amended in the year 2012. Salient Features : • Punishment for Money-Laundering: The act prescribes that any person found guilty of money laundering shall be punishable with rigorous imprisonment from 3 years to 7 years and also be liable to a fine up to 5 lakh rupees. If the offense relates to offense under the Narcotic drugs & psychotropic substances Act, 1985 the maximum punishment could extend to imprisonment for 10 years. 
  • However vide amendment of PMLA act 2002 in 2012, the upper ceiling on the quantum of fine has been done away with.
  • Appellate Tribunal : It is the body appointed by GOI. It is given the power to hear appeals against the orders of the adjudicating authority & any other authority under the act. Orders of the tribunal can be appealed in appropriate high court (for that jurisdiction) & finally to Supreme Court. 

Right to Information Act, 2005

  • The RTI is an act of the Parliament of India "to provide for setting out the practical regime of right to information for citizens" and replaces the erstwhile freedom of Information act, 2002. The act applies to all states & Union Territories of India except Jammu and Kashmir. This law was passed by Parliament on 15 June 2005 and came fully into force on 12 Oct 2005.
  • The Act specifies the time limits for replying to the request
    • If the request has been made to the PIO (Public information officer), the reply is to be given within 30 days of receipt. 
    • If the request has been made to APIO (Assistant Public Information Officer), the reply is given within 35 days of receipt. 
    • Information concerning Corruption and Human rights violations by scheduled security agencies are to be provided within 45 days but with the prior approval of the central information commission.
    • However if life or liberty of any person is involved, the PIO is expected to reply within 48 hours.

Banking Ombudsman Scheme (2006)

  • It has been operative from 1 Jan 2006. Banking ombudsman is a quasi judicial authority functioning under India's Banking ombudsman scheme 2006, and the authority was created to enable resolution of complaints of customers of banks relating to certain services rendered by the banks. 
    • Banking ombudsman (BO) scheme applies to Whole India (including Jammu & Kashmir) 
    • Appointment and Tenure
      • RBI has reserved this BO post for its own CGMs & GMs. 
      • Tenure: 3 years at a time. 
      • Reappointment: Yes possible. 
    • BO deals with the matter less than or equal to Rs. 10 lakh
    • If customer not satisfied with ombudsman. He can approach to Deputy Governor of RBI. 


  • FERA (Foreign Exchange Regulation Act)
    • It is legislation that was passed by the Indian parliament in 1973 and came into effect as of 1 January 1974. FERA imposed strict regulations on transactions involving foreign exchange & controlled the import and export of currency. FERA was repealed by the govt. in 1999 and replaced by the FEMA, which liberalized foreign exchange controls and removed many restrictions on foreign investment. 
  • FEMA (Foreign Exchange Management Act, 1999) :
    • It is an act of the Parliament of India "to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India." 
    • Note : FEMA came into effect on the Pt June 2000, replacing FERA.
That's all for now friends. In our next Banking Awareness lesson, we shall learn about Credit Rating Agencies in India. Happy Reading :)
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