JAIIB LRAB Legal & Regulatory aspects of Banking Short Notes Part 1

JAIIB LRAB Legal & Regulatory Aspects of Banking Short Notes Part 1

JAIIB Exams are conducted by IIBF. JAIIB is one of many the flagship courses offered by IIBF, twice a year. It is conducted in the months of May & November every year. This course of JAIIB has 3 subjects and LARB or Legal & Regulatory Aspects of Banking is one of the three.

Legal & Regulatory Aspects of Banking has 4 modules which are further divided into units.

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Legal and Regulatory Aspects of Banking
  1. Regulations and Compliance
  1. Legal Aspects of Banking Operations
  1. Banking Related Laws
  1. Commercials Laws with Reference to Banking Operations

To check out the detailed syllabus of JAIIB- PPB, AFB & LRAB click here.


JAIIB LRAB Legal & Regulatory aspects of Banking Short Notes Part 1



RBI’s power to issue directions: The Banking Regulation Act, 1949 empowers RBI to issue directions to banking companies in the interest of public, banking policy and depositors. RBI has different powers on different subject matters under different sections:

  • Section 21: Directions to regulate loans and advances by banking companies. This may be done by regulating the purposes of lending, margins in respect of secured loans, rate of interest and terms and conditions of lending.
  • Section 35A: General powers. The Reserve Bank issues directions from time to time under Section 21 (read with Section 35 A) regulating acceptance of deposits & lending.
  • To inspect or conduct, scrutiny of books & accounts:  of banking companies, their books and accounts.

Section 21A: The interest rates on loans & advances contracted b/w a bank and its customer are not liable to be reopened by a court of law.

Section 20: This section restricts on giving loans & advances to directors, and the companies and/or firms in which directors are interested as director, partner, etc.

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Section 42 of RBI Act: Cash Reserve in the form of (time & demand liabilities) with RBI has to be maintained by a banking company (scheduled bank) as notified by the Reserve Bank from time to time.

Section 18 of the BR Act: provides for cash reserve for non-scheduled banking companies.

Penalty: Failure to maintain Cash reserve renders the banking company liable to penalty for a scheduled bank in any week for the first time = 3% of over bank rate. For 2nd time 5% over bank rate.

Section 24 of the BR Act: provides for Liquid Assets that are required to be maintained by Banking companies in the form of demand & time liabilities to the extent as notified by the RBI. 

In addition, Banking companies are also required to maintain such assets in India at not less than 75% of demand & time liabilities as at the close of business of the of every quarter’s last Friday.

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Transfer of Annual Profits to Reserve Fund: Banking companies also have to transfer 25% of their annual profits as disclosed in the profit and loss account.

Selective Credit Control: It’s the regulation of credit to different sectors of the economy. Its purpose is to influence the demand for credit by:

  • Making borrowing (which are relatively inessential) costly for certain purposes, 
  • By imposing stringent conditions on lending for the purposes
  • By giving concessions for desired activities

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The tools that are used for exercising selective credit control are:

  • Minimum margins: for lending against selected commodities
  • Ceiling on the credit levels
  • Charging minimum rate of interest on advances against specified commodities 

Where General Credit Controls operate on the cost & volume of credit, Selective Credit Controls aim at regulating the distribution or direction of bank resources to particulars sectors of the economy.

Scheduled Banks: A bank included in the Schedule-II of the RBI Act. As per its Section 42(6) RBI may include any bank in this schedule if it satisfies the below conditions: 

  • It has paid-up capital and reserves of an aggregate value of not less than Rs. 5,00,000.00
  • Its affairs are not conducted in a manner detrimental to the depositor’s interests; and
  • It is:
  1. State cooperative Bank
  2. A company as defined in section 3 of the companies act
  3. A Central Govt. notified institution.

Important Topic:- JAIIB LRAB MOCK TESTS – Legal & Regulatory Aspects of Banking


Annual Accounts: Every banking company is required to prepare its balance sheet and profit and loss account annually as at the calendar year end or at the end of twelve months as on a date notified by the Central Government.

Audit: The accounts have to be audited by duly qualified auditors.

Returns to RBI & RoC (Registrar of Companies): 3 copies of: 

  • the balance sheet, 
  • profit and loss account and 
  • the auditor’s report 

have to be submitted as returns.

Furnishing of Returns: Banking companies have also to furnish returns like return on maintenance of liquid assets, maintenance of cash reserve, etc.

Acquisition by Government: Govt. may acquire the undertakings of banking companies in certain circumstances based on a Reserve Bank’s Report.

Moratorium: CG may also order moratorium on banking companies on the application of the Reserve Bank (during the duration of which RBI may prepare an amalgamation scheme which may be sanctioned by CG).

This scheme of amalgamation scheme will have over-riding effect on any laws, agreements, etc. 

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Winding Up: RBI may also apply for winding up of a banking company when it is not able to pay its debts and also in certain other circumstances to the High Court.

Penalty: Both RBI Act & the BR Act impose certain penalties for contravention or default committed by banking companies or other persons.

Board for Financial Supervision

Financial Supervision: RBI has set up the Board for Financial Supervision to supervise the affairs of banking companies as per the statutory regulations framed under the Reserve Bank of India Act. 

The board consists of: 

  • Chairman (Governor of RBI), 
  • Vice-Chairman (1 of the Dy. Governor of RBI), 
  • 4 directors from the Central Board. 

Functions: The board performs functions and exercises the powers of supervision and inspection under the RBI Act and the BR Act.

Meeting & Quorum: The board meets at least once in a month. 3 members (1 has to be either Chairman or vice-chairman) shall form a quorum for the meeting.

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