JAIIB LRAB Unit 2 - Control Over Organisation Of Banks

A company wanting to commence banking business requires prior licence from the Reserve Bank.

The Reserve Bank has the discretion to reject licence or approve the licence on such conditions as it thinks fit. Before granting licence, Reserve Bank has to be satisfied by inspection or otherwise of the suitability of the company for licence.

A licence once given may also be cancelled after giving the bank an opportunity to be heard. Further, for opening new branches or shifting branches outside a city, town or village, permission of the Reserve Bank is required.

Banking companies have to have minimum capital and reserves as specified in the Banking Regulation Act. The shareholders of a banking company are entitled to dividends only after all the capitalised expenses are written off.

The commission or brokerage payable on selling shares is restricted to two and half per cent of the paid-up value of the shares.

The board of directors of a bank has to be constituted with persons having special knowledge or experience in accountancy, banking, economics, law, etc., as stipulated. The directors should not have substantial interest in other companies or firms.

The maximum period of office is limited to eight years continuously.

Authorized Capital the maximum limits of share capital which a company is authorised to have under its Memorandum.

Paid-up Capital The amount of share capital of a company is subscribed and paid-up.

Subscribed Capital The amount of share capital of a company, which is issued and subscribed.

The Reserve Bank is empowered to reconstitute the board, if the board is not properly constituted. Every banking company should have a full-time chairman (or a full-time managing director, if there is no fulltime chairman) with the specified qualifications.

The Reserve Bank has powers to remove the chairman and appoint a suitable person in his place in certain cases. The Reserve Bank also has powers to remove the directors or managerial personnel or other employees of banking companies.

The principles of corporate governance including the 'fit and proper' criteria for directors apply to banking companies as well as public sector banks.

A Temporary branch for less than 30 days in a town where a bank has an existing branch does not require permission from RBI.