The Banking Regulation Act, 1949 (BRA) is the main legislation governing the banking sector in India. It was enacted to provide a sound and orderly growth of the banking system and to protect the interests of depositors. The BRA applies to all banking companies in India, including PSBs.
Some of the key provisions of the BRA that apply to PSBs are:
- Licensing: Only a banking company that has been granted a license by the Reserve Bank of India (RBI) can carry on the business of banking in India.
- Capital adequacy: PSBs are required to maintain a minimum capital adequacy ratio of 9%. This means that they must have capital in the amount of 9% of their risk-weighted assets.
- Liquidity: PSBs are required to maintain a minimum liquidity ratio of 25%. This means that they must have liquid assets in the amount of 25% of their demand liabilities.
- Investments: PSBs are restricted in the types of investments they can make. They are not allowed to invest in real estate, for example.
- Borrowing: PSBs are required to obtain the prior approval of the RBI before borrowing from any source.
- Audit: PSBs are required to have their accounts audited by an independent auditor every year.
- Winding up: PSBs can be wound up by the RBI in the event of financial distress.
MCQs on the application of the BRA to PSBs:
- Which of the following is not a key provision of the BRA that applies to PSBs?
- Answer: Minimum capital adequacy ratio of 9%
- What is the minimum liquidity ratio that PSBs are required to maintain?
- Answer: 25%
- What are PSBs not allowed to invest in?
- Answer: Real estate
- What is the RBI’s prior approval required for?
- Answer: Borrowing from any source
- Who audits the accounts of PSBs?
- Answer: Independent auditor
- In what event can the RBI wind up a PSB?
- Answer: Financial distress