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banking_law:notes:functions-of-a-bank

Functions of a Bank : Business of a Banking Company

As per the provisions of the Banking Regulation Act, the functions of a bank can be divided into two categories.

  1. Compulsory functions, and
  2. Permitted function.

Compulsory Function of a Bank

On the basis of the legal definition of bank (Section 5), a bank has its following essential functions i.e., business of banking:

  1. Accepting of deposits of money from the public
  2. Lending or investment of the accepted deposits of money.
  3. Providing facilities of demand and time deposits.
  4. Facilitating withdrawal of the deposits of money through cheque, draft, order, or otherwise.

Permitted Functions of a Bank

In addition to the business of banking (compulsory functions), a bank may engage in any one or more of the following forms of business (as per Section 6):

  1. Borrowing, raising, or taking up of money.
  2. Lending or advancing of money either upon or without security
  3. Drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not.
  4. Granting and issuing of letters of credit, travellers’ cheques and circular.
  5. Buying, selling and dealing in bullion (gold or silver) and specie (metallic coins).
  6. Buying and selling of foreign exchange including foreign bank notes.
  7. Acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds.
  8. Purchasing and selling of bonds, scrips or other forms of securities on behalf of the constituents or others.
  9. Receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise.
  10. Providing the safe deposit vaults.
  11. Collecting and transmitting of money and securities.
  12. Acting as agents for any Government or local authority or any other person or persons.
  13. Carrying on agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and other wise acting as an attorney on behalf of customers, but excluding the business of a managing agent or secretary and treasurer of a company. (Moreover, by implication of Section 384 of the Companies Act, a bank cannot act as a manager.)
  14. Contracting for public and private loans and negotiating and issuing the same.
  15. Effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue.
  16. Carrying on and transacting every kind of guarantee and indemnity business.
  17. Managing, selling and realising any property which may come into the possession of the company in satisfaction of any of its claims.
  18. Acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or its part for any loans or advances or which may be connected with any such security.
  19. Undertaking and executing trusts.
  20. Undertaking the administration of estates as executor, trustee or otherwise.
  21. Establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts, and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons. Granting provisions and allowances and making payments towards insurance.
  22. Acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company.
  23. Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company.
  24. Acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described above.
  25. Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company.
  26. Any other form of business which the Central Government may specify through a notification in the official Gazette, as a form of business in which it is lawful for a banking company to engage.

It may be noted that as per law, a bank cannot engage in any form of business other than those mentioned as above. Madras High Court (1983) held that a chit fund transaction carried on by a banking company is a banking activity under Section 6. Gujarat High Court (1989) held that Loan Organisations such as “Loan Mela” are not objected under the banking practice.

It is important to note that the aforesaid functions are frequently performed by banks in developed countries. In fact, these functions are those of the “mixed banks” including commercial banks, merchant banks, exchange banks and development banks. However these functions do not include those which are performed by the central banks, such as; issuing notes, performing Government business, controlling credit money, etc.

Restrictions of Business of a Bank

Prohibition of Trading According to Section 8, banks are restricted to do the following trading:

Buying, selling or bartering of goods

A bank is prohibited from dealing directly or indirectly in buying or selling or bartering of goods, except in connection with the realisation of security given to it or held by it. [For the purpose of this section, “goods” means every kind of movable property, other than actionable claims, stocks, shares, money, bullion (gold and silver), and specie (metallic coins), and instruments such as bills of exchange, Hundi, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips, etc.]

Engaging in any trade

A bank is prohibited from engaging in any trade, but if a banking company has acquired (not for its own use) any immovable property in the course of its business, it is exempted, under Section 9, to dispose of such property within seven years from its acquisition. (Reserve Bank can extend this period by another period of 5 years.)

Buying, selling or bartering goods for others

A bank is prohibited from buying, selling or bartering goods for others. There are two exceptions in this regard:

  1. A banking company can buy, sell or barter bills of exchange which it has received from others for collection or negotiation, and
  2. when a banking company undertakes the administration of estates as executor, trustee or otherwise, it can trade in such estates.

The Banking Companies Act, 1949 was passed to consolidate and amend the law relating to banking companies. The need for this was felt mainly due to two reasons:

  1. the person who were controlling some banks, were abusing their powers and there were no measures for safeguarding the interests of the depositors, and
  2. there was greater need to safeguard and promote the economic interests of the country in general.

It is important to note that with effect from 1st March, 1966, the name of the Banking Companies Act has been changed to the “Banking Regulation Act, 1949.”


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