LIQUIDITY NORMS

Banking companies have to maintain sufficient liquid assets in the normal course of business. In order to safeguard the interest of depositors and to prevent banks from overextending their resources, liquidity norms have been settled and given statutory recognition. Every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 25% of its demand and time liabilities in India. However, this percentage is changed by the Reserve Bank of India from time to time considering the general economic conditions. This is in addition to the average daily balance which a scheduled bank is required to maintain under Section 42 of the Reserve Bank of India Act and in case of other banking companies, the cash reserve required to be maintained under Section 18 of the Banking Regulation Act.

LICENSING OF BANKING COMPANIES

A banking company can function in India if it holds a licence issued by the Reserve Bank of India in that behalf. Before granting any licence, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the following conditions are fulfilled : (a) That the company is or will be in a position to pay its present or future depositors in full as their claims accrue; (b) That the affairs of the company are not being conducted or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors; (c) That the general character of the proposed management of the company will not be prejudicial to the public interest of its present or future depositors; (d) That the company has adequate capital structure and earning prospects; (e) That the public interest will be served by the grant of a licence to the company to carry on banking business in India. (f) That having regard to the banking facilities available in the proposed principal area of banks already in existince in the area and other relevant factors, the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth. Similarly, prior permission of the Reserve Bank of India is necessary to open a new place of business in India or to change the existing place of business situated in India. Also, no bank-ing company incorporated in India can open a place of business outside India or change the existing place of business without prior permission of the Reserve Bank of India.