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Legal & Regulatory Aspects of Banking - Public Sector Banks and Cooperative Banks

Unit - 5 : Public Sector Banks and Cooperative Banks
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The public sector banks, namely, State Bank and its subsidiaries, the Nationalised banks and the regional rural banks are statutory corporations (or body corporate) established under special statutes.

State Bank and its subsidiaries

State Bank and its subsidiaries, as Nationalised banks, are commercial banks engaged in the business of banking and other forms of business permissible for banking companies.

State Bank Of India was established under Section 3 of the State Bank Of India Act, 1955 for taking over the undertaking of the Imperial Bank Of India. The majority of shares are held by Reserve Bank. Although shares are freely transferable, the Reserve Bank cannot transfer the shares if such transfer would result in reducing its holding below 50% of the issued capital. No shareholder other than Reserve Bank can exercise voting rights above 10%.

The chairman and Managing Director are appointed for a period not exceeding 5 years and are eligible for reappointment. Their services can be terminated by the Central Govt. by giving 3 months notice or notice pay in lieu thereof after consultation with the Reserve Bank.

The State Bank and its subsidiaries and the Nationalised banks also act as agents of the Reserve Bank to transact the banking business of the Central Government.

Subsidiary Banks
SBH State Bank of Hyderabad Act, 1956
SBS Saurashtra State banks(amalgamation) Ordinance, 1950
All other banks State Bank Of India (Subsidiary Banks) Act, 1959

The majority of shares are held by State Bank Of India. Shares are freely transferable as provided in Section 18 of the Act, However State Bank is not entitled to transfer the shares if such transfer would result in reducing its shareholding to less than 50%.

Management of Subsidiary Bank
The Board consists of Chairman of the State Bank (ex-officio chairman), Managing Director and other directors. The state bank appoints Managing Director after consulting the board of subsidiary bank and with the approval of Reserve Bank.

Business of Subsidiary Bank
A subsidiary bank has to act as a agent of State Bank under Section 36 of the SBI Subsidiary Act.

Regional Rural Banks
They were first set up in 1975 under the RRB Ordinance 1975. The ordinance was later replaced by RRB Act, 1976. Section 3 of the RRB Act authorised Central Govt. to establish RRB by notification in the official gazette at the request of Sponsor Bank.

Issued Capital ratio (50:35:15) (Cental Govt:SponsorBank:state govt.)

The regional rural banks are also commercial banks but operating in limited local areas to cater to rural industries, trade, farmers, artisans, etc.


Nationalised Banks

The Bank Nationalisation Act 1970 and Banking companies (Acquisition and Transfer of Undertaking) Act 1980. Transferred the undertaking of existing private banks to the corresponding new banks popularly knows as Nationalised banks.

Paid-up Capital – Originally entire Paidup Capital was held by Central govt., some of these banks have recently made public issue of shares, but the Central Govt. still holds majority of shares in all these banks. The Shares other than those held by the Central Govt. are freely transferrable.

SBI Act 4 Divide capital into shares of Rs.10 each instead of Rs.100

Restriction on voting rights (being 200 shares only) was modified upto 10 % of the Issued Capital and restriction on dividend deleted BC(A&T) 3 Authorised Capital of Rs.1,500 crore divided into shares of Rs.10 each.

The Banking Companies (Acquisition and Transfer of Undertakings)
All public sector banks are governed by their respective, statutes and the rules, regulations or schemes made under these statutes. In addition to this, these banks are also governed by certain provisions of the Banking Regulation Act as stipulated in Section 51 of that Act. The provisions of the Reserve Bank of India Act are also applicable to them.


Cooperative Banks

A Cooperative Bank is a cooperative society engaged in the business of banking.

The co-operative banks, functioning in one state only are registered under the state laws on co-operative societies.

The co-operative banks operating in more than one state, are registered under the multi-state Co-operative Societies Act. The Banking Regulation Act is applicable to co-operative banks as provided in Section 56 of that Act with certain modifications. For this purpose, a co-operative bank means a state co-operative bank, Central co-operative bank and a primary co-operative bank.

While, the constitution of the bank is governed by the co¬operative laws, the business of banking undertaken by them is regulated by the Reserve Bank under the BR Act.

a. If a cooperative bank operates in only one state the state law applies and in case cooperative banks operates in more than one state then the Central Act applies.
b. A cooperative bank means a state cooperative bank, central cooperative bank and a primary cooperative bank.

A cooperative bank shall not grant any loans and advances as under :
a. Loans and advances against its own shares.
b. Unsecured loans or advances to any of its directors
c. Directors interest
d. Unsecured loans and advances in which the Chairman managing agent etc.


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