Chapter 2 Regulatory Framework of Banks – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Regulatory Framework of Banks – CS Professional Banking Law and Practice Study Material
Question 1.
Illustrate nature of complaints considered by the Banking Ombudsman. (Dec 20009, 3 marks)
Answer:
The Banking Ombudsman can receive and consider any complaint relating to the following deficiency in banking services (including internet banking):
- non-payment or inordinate delay in the payment or collection of cheques, drafts, bills etc.;
- non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission in respect thereof;
- non-acceptance, without sufficient cause, of coins tendered and for charging of commission in respect thereof;
- non-payment or delay in payment of inward remittances;
- failure to issue or delay in issue of drafts, pay orders or bankers’ cheques;
- non-adherence to prescribed working hours;
- failure to provide or delay in providing a banking facility (other than loans and advances) promised in writing by a bank or its direct selling agents;
- delays, non-credit of proceeds to parties accounts, non-payment of deposit or non-observance of the Reserve Bank directives, if any, applicable to rate of interest on deposits in any savings, current or other account maintained with a bank;
- complaints from Non-Resident Indians having accounts in India in relation to their remittances from abroad, deposits and other bank- related matters;
- refusal to open deposit accounts without any valid reason for refusal;
- levying of charges without adequate prior notice to the customer;
- non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on ATM/Debit card operations or credit card operations;
- non-disbursement or delay in disbursement of pension (to the extent the grievance can be attributed to the action on the part of the bank concerned, but not with regard to its employees);
- refusal to issue or delay in accepting payment towards taxes, as required by Reserve Bank/Government;
- refusal to issue or delay in issuing, or failure to service or delay in servicing or redemption of Government securities;
- forced closure of deposit accounts without due notice or without sufficient reason;
- refusal to close or delay in closing the accounts;
- non-adherence to the fair practices code as adopted by the bank or non-adherence to the provisions of the code of Banks Commitments to Customers issued by Banking Codes and Standards Board of India and as adopted by the bank;
- non-observance of Reserve Bank guidelines on engagement of recovery agents by banks; and
- any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or other services.
A customer can also lodge a complaint on the following grounds of deficiency in service with respect to loans and advances:
- non-observance of Reserve Bank Directives on interest rates;
- delays in sanction, disbursement or non-observance of prescribed time schedule for disposal of loan applications;
- non-acceptance of application for loans without furnishing valid reasons to the applicant; and
- non-adherence to the provisions of the fair practices code for lenders as adopted by the bank or Code of Bank’s Commitment to Customers, as the case may be;
- non-observance of any other direction or instruction of the Reserve Bank as may be specified by the Reserve Bank for this purpose from time to time;
- the Banking Ombudsman may also deal with such other matter as may be specified by the Reserve Bank from time to time.
Question 2.
‘Banking Ombudsman’ was created for quick and honest redressal of grievances of customers. How effective it has been over the years in redressing the grievances ? Does it create a healthier and ethical customer relationship ? (June 2014, 5 marks)
Answer:
Banking Ombudsman Service is a grievance redressal system. This service is available for complaints against a bank’s deficiency of service. A bank’s customer can submit complaint against the deficiency in the service of the bank’s branch and bank as applicable, and if he does not receive a satisfactory response from the bank, he can approach Banking Ombudsman for further action. Banking Ombudsman is appointed by RBI under Banking Ombudsman Scheme, 2006. RBI as per Sec. 35 A of the Banking Regulation Act, 1949 introduced the Banking Ombudsman Scheme with effect from 1995.
The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services. All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme. Banking Ombudsman has helped to create a healthier and ethical customer relationship by covering deficiencies in following banking services:
- deficiency in customer service like non-acceptance, without sufficient cause of small denomination notes tendered for any purpose and for charging of commission in respect thereof;
- delayed or non-payment of inward remittance, delay in issuance of drafts;
- non-adherence to prescribed working hours;
- refusal to open deposit accounts without any valid reason for refusal;
- levying of charges without adequate prior notice to the customer;
- forced closure of deposit accounts without due notice or without sufficient reason;
- refusal to close or delay in closing the accounts; etc.
- non-adherence to the fair practices code as adopted by the bank or non-adherence to the provisions of the Code of Bank’s Commitments to Customers issued by Banking Codes and Standards Board of India and as adopted by the bank;
- non-observance of Reserve Bank guidelines on engagement of recovery agents by banks; and any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or other services.
According to the RBI data, during the year 2012-13, OBOs handled 75183 complaints. This, comprised of 4642 complaints brought forward from the previous year and 70541 fresh complaints received during the year under review. Of these 69704 complaints (93%) were disposed of during the year 2012-13.
Moreover, over last three years, percentage of maintainable complaints has increased gradually from 49% in 2010-11 to 56% in 2012-13. This indicates increasing awareness about the applicability of the BOS among bank customers. During the year OBOs issued 312 Awards. Thus, we can say that Banking Ombudsman are playing effective role in redressing the grievances of customers.
Question 3.
State the role of RBI as a banker to the government. (Dec 2015, 5 marks)
Answer:
In terms of Section 20 and 21 of RBI Act, the RBI has the obligation to transact the banking business of the Central Government. Accordingly, it is required to accept money for account of the Government, to make payments on its behalf up to the amount outstanding in the credit of the Government and also to carry out the Government’s exchange, remittance and other banking operations including the management of the public debt.
It acts as an advisor to the Government. RBI performs similar functions on behalf of State Governments by virtue of agreements entered into with them under Section 21 A. RBI has entrusted the work of payment and receipts on behalf of Government to its agents like State Bank of India and its Associate Banks. Some other commercial banks are also doing some Government transactions as an agent of RBI.
Question 4.
What is position of a Chief Compliance Officer (CCO) in a Bank and also describe his duties and responsibilities? (Aug 2021, 6 marks)
Answer:
As part of robust compliance system, banks are required, inter-alia, to have an effective compliance culture, independent corporate compliance function and a strong compliance risk management programme at bank and group level. Such an independent compliance function is required to be headed by a designated Chief Compliance Officer (CCO) selected through a suitable process with an appropriate ‘fit and proper’ evaluation/selection criteria to manage compliance risk effectively.
The CCO shall be a senior executive of the bank, preferably in the rank of a General Manager or an equivalent position, not below two levels from the Chief Executive Officer (CEO).
- The CCO is required to have a good understanding of industry and risk management, knowledge of regulations, legal framework, and sensitivity to expectations of supervisors.
- There should not be any vigilance case or adverse observation from the Reserve Bank of India pending against the candidate identified for the appointment as CCO.
- The CCO shall have an overall experience of at least 15 years in the banking or financial services, out of which minimum 5 years shall be in the Audit/ Finance / Compliance/Legal/Risk Management functions. The candidate identified for appointment as the CCO should not be more than 55 years of age.
- The CCO shall have the ability to independently exercise judgment. He should have the freedom and sufficient authority to interact with regulators /supervisors directly and ensure compliance.
Duties and Responsibilities
These shall include at least the following activities:
- To apprise the Board and senior management on regulations, rules and standards and any further developments.
- To provide clarification on any compliance related issues.
- To conduct assessment of the compliance risk (at least once a year) and to develop a risk-oriented activity plan for compliance assessment. The activity plan should be submitted to the Audit Committee of the Board of Directors (ACB) for approval and be made available to the internal audit.
- To report promptly to the Board /ACB / MD & CEO about any major changes / observations relating to the compliance risk.
- To periodically report on compliance failures / breaches to the Board /ACB and circulating to the concerned functional heads.
- To monitor and periodically test compliance by performing sufficient and representative compliance testing. The results of the compliance testing should be placed to Board / ACB / MD & CEO.
- To examine sustenance of compliance as an integral part of compliance testing and annual compliance assessment exercise.
- To ensure compliance of Supervisory observations made by RBI and/or any other directions in both letter and spirit in a time bound and sustainable manner.
- Assessment of policies and procedures.
- Research on banking laws and consumer protection law.
- Conducting audit and inspection.
- Compliance to Risk Management Unit.
Question 5.
Banks have full autonomy to adopt any lending practices. They may provide loans and advances to any Sector or any Industry. Write a brief note on statutory restrictions on lending under Banking Regulation Act, 1949. (Aug 2021, 6 marks)
Answer:
Under Banking Regulation Act, 1949, there are statutory restrictions on banks for lending. Brief of such restrictions are as under:
Advances against bank’s own shares : In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant any loans and advances on the security of its own shares.
Advances to bank’s Directors : Section 20(1) of the Banking Regulation Act, 1949 lays down the restrictions on loans and advances to the Directors and the firms in which they hold substantial interest.
Advances to Companies for Buy-back of their Securities : As per provisions of the Companies Act, 2013, companies are permitted to purchase their own shares or other specified securities out of their free reserves / securities premium account or from the proceeds of any shares or other specified securities subject to compliance of statutory conditions. In view of the above, banks should not provide loans to companies for buyback of shares / securities.
Granting loans and advances to relatives of Directors : Without prior approval of the Board or without the knowledge of the Board, no loans and advances should be granted to relatives of the bank’s Chairman/ Managing Director or other Directors, Directors (including Chairman / Managing Director) of other banks and their relatives, Directors of Scheduled Co-operative Banks and their relatives, Directors of Subsidiaries / Trustees of Mutual Funds / Venture Capital Funds set up by the financing banks or other banks.
Restrictions on Grant of Financial Assistance to Industries Producing / Consuming Ozone Depleting Substances (ODS) : Banks should not extend finance for setting up of new units consuming / producing the Ozone Depleting Substances (ODS). No financial assistance should be extended to small/medium scale units engaged in the manufacture of the aerosol units using Chlorofluorocarbons (CFC) and no refinance would be extended to any project assisted in this sector.
Restrictions on Advances against Sensitive Commodities under Selective Credit Control (SCC): With a view to prevent speculative holding of essential commodities with the help of bank credit and the resultant rise in their prices. Reserve Bank of India issues directives from time to time to all commercial banks, stipulating specific restrictions on bank advances against specified sensitive commodities.
Banks and their subsidiaries should not undertake financing of ‘Bacfia’ transactions. Banks should not extend bridge loans against amounts receivable from Central / State Governments by way of subsidies, refunds, reimbursements, capital contributions, etc. subject to certain exemptions like financing against receivables from Government by exporters (viz. Duty Draw Back and IPRS).