Chapter – 2 Banking Structure & Legal Aspects


After independence, steps were taken in order to regulate the banking and banking business in India. Government brought in a law in this regard, where in banking and banking business in India has been defined. This law became an Act and called the Banking Regulation Act,(BR Act), 1949.

As per the Act, Section 5(c) provides that ‘a banking company is a company which transacts the business of banking in India.

Further, Section 5(b) of the BR Act defines banking business as, accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.


ibps bank structure of co operative banks

ibps bank structure

• Scheduled Banks have been defined in the Reserve Bank of India Act as those which are included in the second schedule of the RBI Act, 1934

• In order to be included in the second schedule of the RBI Act, a bank must fulfill the following three criteria:

(i) the paid up capital and reserves together should not be less than Rupees 5 lakhs.

(ii) working of the bank should not be detrimental to the interests of the depositors.

(iii) the banks to be included in the second schedule should either be a company as per the Companies Act, 1956 or a State Cooperative Bank or a corporation or any institution notified by the Government of India in this behalf.

• On the other hand a non-scheduled bank is one whose paid up capital is less than Rupees 5 lakhs.

A Unit Banking System comprises of a main corporate office having single branch doing banking business in a given area of operation

financial instrument

The governance of banks in India is largely controlled by some important laws Acts. Illustratively, these are :

1. The Reserve Bank of India Act (1934)

2. The Banking Regulation Act (1949) that applies to all activities of all banking companies including sections applicable to Cooperative Banks in India.

3. Negotiable Instruments Act (1881).

4. Bankers’ Books Evidence Act (1891),

5. SBI Act (1955),

6. Regional Rural Bank Act (1976),
The Reserve Bank of India is responsible for the regulation and supervision of banks as empowered under the Banking Regulation Act.


What is FIMMDA?FIMMDA stands for The Fixed Income Money Market and Derivatives Association of India (FIMMDA). It is an Association of Commercial Banks, Financial Institutions and Primary Dealers.
FIMMDA is a voluntary market body for the bond, Money and Derivatives Markets.


ISE has setup an Investor Protection Fund (IPF) to meet the claims of investors against defaulter Members, in accordance with the Guidelines issued by the Ministry of finance, Government of India.

ISE has established an Inter-connected Stock Exchange Investor Protection Fund Trust (ISE-IPF Trust) with the objective of compensating investors in the event of defaulters’ assets not being sufficient to meet the admitted claims of investors, promoting investor education, awareness and research. The Investor Protection Fund (IPF) is administered by way of registered Trust created for the purpose.

The Inter-connected Stock Exchange Investor Protection Fund Trust is managed by Trustees. The Inter-connected Stock Exchange Investor Protection Fund Trust, based on the recommendations of the Defaulters’ Committee, compensates the investors to the extent of funds found in sufficient in Defaulters’ account to meet the admitted value of claim, subject to a maximum limit as per decided by Trust per investor per defaulter/expelled member.


1. Savings Bank Account

Savings Bank accounts as the name implies, are intended for savings for future. The very purpose of this type of account is to promote savings habit of the general public. As such, there is no restriction on the number and amount of deposits that can be made. The credit balance outstanding in this account will earn interest as per the current directives of the Bank. When needed, the amount can be withdrawn, subject to certain conditions.

Introduction of the Savings account

All savings bank accounts are required to be introduced by someone known to the bank or customer having an account in that bank.

For whom to open Savings Bank Accounts
Savings Bank Accounts may be opened in the names of :-

(i) Individual – Single Accounts

(ii) Two or more individuals – Joint Accounts

(iii) Illiterate persons

(iv) Blind persons

(v) Minors

(vi) Associations, Clubs, Societies.

(vii) Trusts

(viii) Institutions/Agencies specially permitted by the RBI.

• Savings bank accounts of military units may be opened for funds of Regimental Units which mainly consists of contributions from individual members of the unit, income from Regimental properties, collections made on Army day, etc.

• Interest is paid on daily basis calculated between 10th and 30th of each month.

• At present banks pay an interest of 4% on the savings bank account.

• Minimum balance to open a normal savings bank account is Rupees 1000=00. However, poor people defined by the Government of India, can open a savings bank account with zero balance called No-Frill Savings Bank Account.

Current Account

Meaning & Purpose

Current Accounts are active accounts opened by such section of the public like Traders, Businessmen, Corporate Bodies, etc. who like to operate their accounts continuously due to many receipts and payments of money in connection with their business. In these accounts, there is no restriction on the number of withdrawals and deposits.

Opening of Current Accounts – Introduction

All current accounts should be introduced by persons well known to the bank. Introduction by an existing current account holder should generally be insisted upon.

For whom to open Current Accounts Current

Accounts may be opened in the names of following :-

(i) Accounts in the name of a single person.

(ii) Joint Accounts of two or more individuals.

(iii) Sole-Proprietory Concern.

(iv) Partnership Firms.

(v) Joint Hindu Family or Hindu Undivided Family.

(vi) Associations, Clubs, Societies.

(vii) Trusts/Other Trust Accounts like Provident Fund A/cs.

(viii) Private and Public Limited Companies and other undertakings registered under Companies Act, 1956.

(ix) Executors and Administrators.

(x) Other Banks.

(xi) State Financial Corporations.

(xii) Government/Quasi Government Departments Boards/Bodies etc.

No interest is paid in current accounts. However banks may charge a reasonable amount from the customer clients if the balance falls below the stipulated amount.

Fixed Deposits / Term Deposits

Meaning & Scope of Fixed / Term Deposits

• The term fixed deposit will include both deposits made for a fixed period and deposits made subject to notice of withdrawal.

• Fixed deposits are term deposits repayable after an agreed period fixed at the time of deposit

• On the other hand, call deposits (accounts) can be treated as demand or term liabilities subject to terms of repayment and notice of withdrawal agreed at the time of accepting these deposits.

Who can open Fixed Deposit Accounts

Fixed Deposits can be opened in the name of :

• Individuals,

• Joint names of two or more individuals,

• Clubs, Association, Societies, Trusts, etc.

• Limited Companies,

• Minor under the guardianship of the natural guardians or guardians appointed by the Court of Law,

• Partnership or Proprietary concerns.

Other Features

• Money is deposited in the account and period is decided by the customer.

• Premature withdrawal is allowed in such accounts. In case of premature withdrawal customer is paid rate of interest charged is the one that is applicable for the period the deposit remained in the bank. The interest is calculated for the duration it remained with the bank.

• The customer / client has to pay some reasonable penalty fixed by each bank for premature withdrawal.

• Fixed deposits are not transferable instruments.

• Fixed deposits / term deposits attract higher rate of interest than other deposit schemes.

• Normally longer the period of deposit higher the interest rate. In some banks it is called time liability deposit accounts. However this principle does not always hold good due to the banks deposit needs and market conditions.

DEMAT Accounts

DEMAT means Dematerialized Account. This account is opened to buy and sell shares in the market. It is opened like any other bank account with the difference that in such accounts only shares are transacted and not money as is the case with other bank accounts.

Indian Depository Receipt:

An IDR is a receipt, declaring ownership of shares of a foreign company. These receipts can be listed in India and traded in rupees. Just like overseas investors in the US-listed American Depository Receipts (ADRs) of Infosys and Wipro get receipts against ownership of shares held by an Indian custodian, an IDR is proof of ownership of foreign company’s shares. The IDRs are denominated in Indian currency and are issued by a domestic depository and the underlying equity shares are secured with a custodian. An Indian investor pays in Indian rupees for the IDR whereas a shareholder in the issuer’s home country pays in home currency

Public Provident Fund Accounts (PPF)

• Public Provident Fund (PPF) is the scheme floated under the PPF Act 1968 by central government. It is a safe and government backed investment scheme which provides besides higher interest rate a tax benefit under section 80C of IT Act.

Features of the PPF Scheme

• The period for which money could be invested in PPF is 15 years

• Minimum investment is Rs.500 and Maximum investment is Rs.1,00,000 per year.

• Amount invested more than Rs.1,00,000 will not be eligible for interest and for tax benefit under Sec 80C.

• One is eligible to open only one PPF account in one’s name. But if found that second account is opened it will be deactivated. You will receive only principal of what you paid.

• PPF can’t be opened in joint names. However, PPF accounts can be opened in the names of spouse or children.

• PPF account can be opened in your minor child name also.

• You can’t invest more than 12 installments in a year. It means if you planned for contribution of Rs.1,000 per month, then maximum contribution you can make is 12,000 in a year.

• This account cannot be attached for your debt or liability. So this is totally safest form of investment.

• PPF account can be opened at all nationalized banks, post offices or other banks so permitted.

• If you forget to contribute the minimum amount in any year then the account will be deactivated. To activate you need to pay Rs.50 as penalty for each inactive year and also you need to pay Rs.500 for each inactive year’s contribution. Such provision can be modified from time to time by appropriate authority.

• NRIs cannot open PPF account. But they can continue their existing account till its maturity only. Scheme does not provide any extension of period.

• In case death of account holder then the balance amount will be paid to his nominee or legal heir even before 15 years. Nominees or legal heirs are not eligible to continue the deceased account.

• PPF can be transferred from one place to another place. But can’t be transferred from one name to another.

• A person having an Employee’s Provident Fund Account can open a Public Provident Fund Account since both are different.

• Once your account completes 15 years then following options are available to subscriber :

(a) You can withdraw your whole amount.

(b) You can extend for a 5 years block as many times as you wish.

Senior Citizen’s Account

• As per the Government guidelines, people above the age of 60 years are treated as senior citizen

• Senior Citizen accounts are normal savings accounts with the difference that an interest benefit of between 0.25% and 0.50% per annum or as decided by respective banks from time to time is given to the beneficiary account holder.

• This scheme became effective from April 19, 2001.

• In such accounts where a senior citizen open as joint account, the first name in the account should be that of senior citizen only then the benefit of the scheme goes to senior citizen.

• The accounts under senior citizen scheme are applicable to those senior citizens who are residents of India.


Who is Non-Resident Indian?

Definition of NRI

Foreign Exchange Management Act (FEMA) 1999, defines a Non-Resident Indian as:

(a) A person resident outside India who is a citizen of India, i.e.

(i) Indian citizens who go abroad for employment or for carrying on any business or vacation etc. indicating indefinite period of stay outside India.

(ii) Indian citizens working abroad on assignments with Foreign Governments, Government Agencies or International/Multinational Monetary Fund (IMF), and World Bank etc.

(iii) Officials of Central and State Governments and Public Sector Undertaking deputed abroad on assignments with Foreign Govt. Agencies/Organization or posted to their own offices including Indian Diplomatic Missions abroad.

(b) A person of Indian origin who is a citizen of any country other than Bangladesh or Pakistan, if

(i) He, at any time, held an Indian passport.

(ii) He or either of this parents or any of its grand parents were a citizen of India by virtue of Constitution of India or Citizenship Act 1955 (57 of 1955)

(iii) The person is a spouse of an Indian Citizen or a person referred in sub clause b (i) or (ii) above.

The above definition of NRI in simple words means:

• A person of Indian nationality or origin, who resides abroad for business or vocation or employment, or having an intention of employment or vocation, when the period of stay abroad is indefinite.

• A person is of Indian origin is an NRI if he has held an Indian passport, or he/she or any of his/heir parents or grandparents were/are a citizen of India.

• While a spouse, who is a foreign citizen, of an Indian citizen or a person of Indian origin, is also treated as a person of Indian origin, for the purpose of opening of bank accounts and other facilities granted for investments into India, provided such accounts or investments are in the joint names of spouse.

• For instance, students going abroad for higher studies, are not NRIs, while, government officials going abroad on posting to Indian missions or World Bank, IMF, etc., are NRIs.

• Tourists on brief visit to foreign countries are not categorized as NRIs

Types of NRI Accounts And Their Features

Different types of non-resident accounts can be opened by banks in India. Their types, important features, requirements and operational aspects are briefly given below:

NRI Accounts-Rupee and Foreign Currency Accounts

A Non-resident Indian can open following types of accounts:

1. Non-resident (External) Rupee Account (NRE)

2. Non-resident Ordinary Rupee account (NRO)

3. Foreign Currency (Non-resident) Account (Banks) [FCNR(B)]

Features of Accounts

1. Non-resident (External) Rupee Account (NRE Accounts)

• NRE accounts can be opened and maintained by Non Resident Indians through any of the following modes:

(i) remittances from abroad by way of TT, checks, drafts, or even transfer from another Non-Resident account.

(ii) by tendering of foreign currency travellers cheques or notes by the NRI during his temporary visit to India, provided the bank is satisfied about his non-resident status.

• NRE account can be opened as Saving Bank account or Current Account, or Recurring Deposit Account or Term Deposit for a minimum period of one year.

• An NRI can open NRE accounts as Joint Accounts, in the name of two or more non-resident individuals. Such individuals could be of Indian nationality or Indian origin.

• Opening of NRE account, jointly with a person resident in India is not permitted.

• No lien is permitted to be marked on the balances held in NRE savings account.

Permitted Credits

The RBI has permitted the following important credits that can be put into the NRE accounts:

(a) Remittance to India in any permitted currency.

(b) Personal cheques drawn on foreign currency account of the account holder.

(c) Travellers cheques and bank drafts drawn in any permitted currency

(d) Foreign currency/bank notes tendered during his temporary visit.

(e) Transfer from any other NRE/FCNR (B) Accounts.

(f) Any other credit if covered under general permission or specific permission granted by Reserve Bank of India.

Permitted debits

The following debits are freely permitted in the NRE accounts:

(a) Local disbursements/payments

(b) Remittance outside India

(c) Transfer to any NRE/FCNR(B) Account

(d) Investments in shares/securities, etc.

Other facilities

NRE accounts also, offer following other facilities to NRI depositor:

(a) A cheque book facility in saving or Current account is allowed.

(b) Full repatriation of deposit amount including interest permitted.

(c) Maturity proceeds can be transferred to another bank, as desired by the depositor.

(d) Nomination facility is permitted. Nominee can be either resident or non-resident.

(e) Income by way of interest on balances held in NRE account is exempted from income tax as on date.

(f) Residents Indian can operate the account on the basis of power of attorney granted by account holder. However the power of attorney holder cannot repatriate funds outside India.

(g) Banks may allow temporary overdrawing up to Rs.50,000/- (at present) in NRE saving account, to be adjusted within 2 weeks of availment.

Interest on NRE Deposits

Interest varies from time to time at the discretion of the respective banks.

2. Non-resident Ordinary Rupee Account (NRO)

• NRO accounts are Rupee accounts.

• NRO accounts can be opened and maintained by any person resident outside India and also by Foreign Tourist, who are on a short visit to India on tourist visa.

• The new accounts can be opened by sending fresh remittances from abroad or by transfer of funds from NRO/NRE/FCNR accounts.

• When a resident becomes a non-Resident, his domestic Rupee account, is re-designated as an NRO account.

• NRO account of an NRI is just like any other domestic account, opened and maintained to facilitate credits which accrue in India from investments that were made prior to his leaving the country.

• NRO accounts can be opened in Indian rupees only as saving bank account, current account, recurring deposit account and term deposit account.

• Most of the regulations for interest rates, amount or tenor, etc., applicable to NRO accounts are similar to those for domestic deposit accounts.

• The interest on NRO accounts is subject to deduction of Income Tax at source, as prescribed from time to time by the appropriate authority.

• NRO accounts can be opened as Joint Accounts, with resident Indians.

Permissible Credits

The following credits are freely permitted to be credited to NRO accounts:

(a) Any remittance from abroad in permitted currency.

(b) Currency tendered during visit to India of the account holder.

(c) Any legitimate dues in India of the account holder can be credited to such account. For instance, rent, interest, dividend, and maturity proceeds of Units of UTI, LIC policy maturities, etc. can be credited.

Permissible Debits

• All local payments in Indian rupees.

• Remittance outside India of the account holder, net of applicable taxes. For example, interest, dividend, rent, etc. can be debited to such account.

• Any other transactions if covered under general or specific permission granted by RBI.


FCNR accounts are foreign currency accounts which can be opened and maintained by Non-Resident Indians, in Designated Currencies only, viz., US dollar, EURO, Great Britain Pounds, Japanese Yen,. Canadian dollar and Australian dollar as of now.

NRIs can open these accounts only in the form to Term Deposits, for a minimum period of ONE year and maximum period of FIVE years. Joint accounts can be opened in the name of two or more non-resident individuals, who are persons of Indian nationality or Indian origin.


The Single Euro Payments Area (SEPA) is where more than 500 million citizens, over 20 million businesses and European public authorities can make and receive payments in euro under the same basic conditions, rights and obligations, regardless of their location.

The introduction of the euro has helped to make cash payments anywhere in the euro area just as easy as at home. But until recently it was not so easy to pay for goods or services electronically in another euro area country.

Permitted Credits and Debits

Credits permissible in FCNR (B) accounts are the same as that in NRE Rupee account. Other Facilities

(a) There is no exchange risk for the account holder as the account is maintained in foreign currency.

(b) Repatriation of principal amount along with interest is permitted.

(c) The interest on the deposit shall be paid on the basis of 360 days to a year, cumulative on half-yearly intervals of 180 days.

(d) Nomination facility is available.

(e) Income earned by way of Interest is exempted from income tax.

(f) No operation by way of power of attorney to the resident is permitted, since there are no local withdrawals.

(g) Forward Cover can be booked to hedge the balance held in FCNR account.

Interest on FCNR (B) accounts : Interest rate can vary from time to time as per the policy of the RBI and respective banks.


Post Office Savings Accounts – types and features

• Period / duration of the savings account is normal as in other cases.

• Rate of interest is 4% per annum.

• Interest is tax free up to Rs.10,000/=.

• Earlier maximum amount that could be accumulated in savings bank was Rs.2,00,000/= but now there is no limit

• Cheque book facility is available.

Term Deposit Accounts

• These term deposits are for different periods, i.e. 1, 2, 3, and 5 years.

• Rate of interest per annum varies with duration or period of deposit. As on 31.3.2014 it is 8.2% for 1-2 year; 8.3% for 3 years and 8.4% for 5 years duration term deposits.

• Income tax benefit is available under section 80 C in case of term deposit for 5 years duration.

• Interest is chargeable quarterly.

Monthly Income Scheme (MIS)

• Duration of deposits under monthly income scheme is 5 years.

• Rate of interest as on 31.3.2014 is 8.4% p.a.

• No tax benefit is available in MIS of post office.

Senior Citizen Scheme (SCS)

• The senior citizen scheme is having deposit duration of 5 years

• Rate of interest per annum is 9.2% as on 31.3.2014.

• Tax is deducted at source in SCS.

• There is no tax benefit in SCS. All existing income tax rules will apply in such accounts.

• A depositor may operate more than one account in individual capacity or jointly with spouse.

• Minimum age for opening such account is 60 years.

• Interest is chargeable on quarterly basis.

• Maximum amount that can be deposited in SCS is Rupees 15,00,000/=.

• Interest is paid on 31st March / 30th June / 30th September and 31st December every year.

Public Provident Fund Scheme

• The scheme is the same with the same features as discussed in earlier paragraph on PPF scheme.

National Savings Scheme (VIII issue)

• The period is 5 years from the date of deposit.

• Minimum amount is Rs.100/=.No maximum limit prescribed.

• Denominations of certificates available are for Rs.100/-, 500/- 1000/-, 5000/- and Rs.10,000/=.

• Rate of interest is 8.5% p.a. as on 31.3.2014

• Income Tax rebate is available under section 80C.

• Interest is chargeable half yearly and paid annually and is deemed to be reinvested.

• Any individual person can buy these certificates as an adult himself or on behalf of a minor; or a Trust can buy such certificates

National Savings Scheme (IX issue)

• Duration of such deposits is 10 years.

• Rate of interest is 8.8% p.a.

• Income Tax rebates is available under section 80 C of the Income Tax Act.

• Interest is chargeable half yearly and is deemed reinvested.

Opening of Post Office Accounts (Requirement of documents)

• One recent photograph (passport size) for individual cases and in case of joint accounts, photographs of all joint holders.

• Any one of the following documents for identification of account holder:

• Election photo Identity card•Ration card with photograph

• Passport

• Driving License

• Job card issued under MG-NREGA duly signed by an officer of State Government

• Post office identity card

• Identity card issued by Central/State government or PSU

• Photo identity card issued by recognized university/education board/college/school

• Aadhaar card with number and address (UIDAI).

For Address Proof any of the following one document

• Bank or post office passbook / Statement with current address.

• Passport with current address

• Ration card with current address

• Electricity bill not more than 3 month old

• Telephone bill not more than 3 months old.

• Salary slip of reputed employer with current address

• Certificate from Public Authority/Postman or Gram Dak Sewak or Branch Postmaster

• UIDAI letter containing address and name of the prospective account opener.

Attestation of Documents

• Documents could be self-attested.

• In case of illiterate depositors should be attested by Gazetted Officer / Sarpanch / Branch Sub-head / Chief Post Master or Postman/ Gram Dak Sewak.

• In case money is invested / deposited through an agent, the agent can attest the same.

• In case savings go beyond Rs.50,000/=, a copy of PAN Card be obtained or Declaration form 60 be submitted.