POWERS & FUNCTIONS OF DIRECTORS IN A BANKING COMPANY

 

POWERS & FUNCTIONS OF DIRECTORS IN A BANKING COMPANY

 

A ‘Director’ is an elected individual who, along with other Directors, is responsible for a Bank’s policy and other fields. Collectively, the Directors form the Board of Directors. It can be said that in a Company, a Director is a hired person who is in charge of managing its business. Primarily, the Directors aim to look out for the wellbeing of the Bank and promote success for the benefit of its members, depositors, shareholders and other creditors. For this reason, the Directors are bestowed with various powers over any part or whole of the Banking Companies and they are liable to perform certain functions in accordance to the power given to them.

 

In Indian Banking System, before 1949, the provisions of Part XA of the Indian Companies Act, 1913 (as amended in 1936) governed the banking companies in India. Therefore, the Directors of these Banking Companies were also used to be governed by these provisions. However, these provisions kept the interests of the shareholders on a higher pedestal and paid no heed to the interests of Depositors. To address this inadequacy as well as to ensure sound and balanced development of the Indian Banking Sector, separate Legislation known as the Banking Companies Act, 1949 came into force. In 1965, this Act was renamed as the Banking Regulation Act, 1949 and was extended to include Co-operative Banks also.

 

Later in 1969 and 1980, fourteen and six Private Sector Banks, respectively, underwent Nationalization and to govern the same, a new Act named the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (as amended in 1980) was introduced. Both the Acts of 1949 (as amended in 2020) and of 1970 (as amended in 1980) became the stationary basis for supervising and regulating the Banking System in India. It is to be noted that in the Section 1(4)(c) of the Companies Act, 2013 expressly state that the Act is applicable to Banking Companies as well, to the extent that it is consistent with the Banking Regulation Act, 1949. Furthermore, Section 2(39) of the said Act states that even a scheduled bank is included within the definition of a financial institution.

 

Beside the abovementioned Acts, the Reserve Bank of India Act, 1934; the Banking Ombudsman Scheme, 2006 (as amended in 2009); the Government Securities Act, 2006; the Negotiable Instruments Act, 1881; the National Bank for Agriculture and Rural Development Act, 1981, the Debts Recovery Tribunal (Procedure) Rules etc. also contain important provisions as to the banking system in India and Directors, being responsible for the overall performance of the Banking Companies are also obliged to abide by the provisions of the various Act that are concerned about Banking Legislation. These Directors also face certain liabilities as provided under the Banking Regulation Act and other Acts which in turn, helps in the efficient development of a banking legal system which is fair and just.

 

Before, discussing the power and functions of the Directors, it is necessary for us to gain a basic understanding as to what is a banking company, what is banking. This is because the primary knowledge regarding the banking system is undoubtedly essential to realize field upon which these Directors exercise their powers and carry on their functions.

 

What is Banking:

 

The concept of Banking is almost as old as the civilization itself. Various writers have defined the term ‘banking’ in various ways. The Banking Regulation Act, 1949 has provided the first systematic attempt in India to define “Banking”. Section 5(b) of the Act states that ‘banking’ means accepting for the purpose of lending or investment, of the deposits of money from the public, repayable on demand or otherwise, and are withdrawable by cheque, draft, order or otherwise.

 

Who is a Banker:

 

According to Dr. H.L. Herbert Hart, Banker is a person or a company carrying on business of receiving money and collecting drafts for their customers and subject to the obligation of honoring cheques drawn upon them by their customers from time to time from the amount available in their current account.

 

Section 3 of the Negotiable Instruments Act, 1881 states that Banker includes any person acting as banker and post office savings bank. In Mudaliar v. Dist. Collector, Chittor[1], the Court stated that a Government treasury would be considered a banker under Section 3 of the Negotiable Instruments Act, 1881.

 

What is a Banking Company:

 

Section 5(c) of the Banking Regulation Act, 1949 defines the Banking Company as any company which transacts the business of banking in India. It further explains that the companies which are engaged in manufacture of any goods or carry on trade and accepts deposit from public merely for financing their business are not deemed to be transacting business of banking within the meaning of Section 5(c) of the Banking Regulation Act, 1949.

 

It was held in the case Kalipada Sinha v. Mahaluxmi Bank Ltd[2], a ‘Banking Company’ means a company which carries on the business of banking, no matter, if the same is not carried on for some time.

 

Thus, a Banking Company has following features-

 

v A Banking Company accepts deposits of money from the public

v After accepting money, they usually lend or invest such deposit.

v The deposits of money should be repayable to the depositor on demand or according to the agreement reached between depositor and banker.

v Deposits are withdrawable by cheque, draft, order or otherwise.

v They maintain the current account or other records of similar nature in which names of the customers and deposits are entered.

 

Who is Director:

 

The term ‘Director’ is a title given to the senior management staff of business or other large organizations. In case of a Company, a Director is a person hired by the Company to manage and run its business. Section 2(34) of the Companies Act, 2013 lays down that ‘Director’ means a Director appointed to the Board of a Company. The term ‘Director’ has not been separately defined in the Banking Regulation Act, 1949 or anywhere else in the banking legislation. Therefore, the definition of Director as provided under the provisions of the Companies Act is applicable to define the Directors of a Banking Company.

 

In a Banking Company, Directors are placed in a position of trust by the Bank’s shareholders, and both statutes and common law place responsibilities for the affairs of a Bank firmly and squarely on the Directors of such Banking Company. The Board of Directors in a Bank delegate the day-to-day business of the bank to its officers and employees.

 

What is Board of Directors:

 

The term ‘Board of Directors’ has also not been defined by the Banking Regulation Act. But Section 2(10) of the Companies Act, 2013 states that the Board of Directors in relation to a company means the collective body of the Directors of such company.

 

Therefore, the Board of Directors in Banking Company is a qualified and committed team of Directors responsible for setting strategic direction of the bank and ensuring that senior management, employees and the Board itself comply with the established policies, as well as federal and state laws and regulations.

 

Board of Directors in Nationalized Banks:

 

Section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 provides that the Board of Directors of Nationalized Banks are made of five whole-time Directors who are-

 

i)             an official of Central Government,

ii)           an individual having expertise and experience in regulation or supervision of commercial bank who is nominated on the recommendation of RBI,

iii)         an individual falling within the definition of ‘workmen’ under Section 2(s) of the Industrial Disputes Act, 1947,

iv)         an individual who must not fall within the ambit of ‘workmen’ under the said provision,

v)            an individual who has been a chartered accountant for not less than 15 years.

 

Beside these, six non-official Directors with specialized knowledge in agricultural and rural economy, banking, cooperative, economics, finance, law etc. are appointed,

 

The Directors on the Board of Private Sector Banks are appointed according to Section 10A of the Banking Regulation Act, which states that atleast 51% of the Board members must possess specialized knowledge or practical experience in Accountancy, Agricultural and rural economy, Banking, Co-operation, Finance, Law any other matter deemed useful in the opinion of RBI.

 

Powers & Functions of Directors in a Banking Company:

 

As mentioned above, the Board of Directors of any Banking Companies is constructed with people having specialized knowledge in various fields. The Directors are also responsible for safeguarding the interests of the shareholders, depositors and other creditors and also the employees of the Bank. Such safeguarding must be done through the lawful, informed, efficient and able administration of the Banking Company. Let us now discuss the powers and functions of the Directors in further details-

 

i)             Determination of Objectives-

 

In a Report of RBI named ‘CORPORATE GOVERNANCE IN INDIA: CURRENT STATUS & RECOMMENDATIONS’ published in 2001 clearly laid down that Banks need to develop mechanisms to ensure percolation of corporate strategic objectives and sound values throughout the organisation. Banks are artificial persons having no real will or mind. Therefore, it is the Directors who are initially responsible for setting up the objectives of banking business which is followed by strategies decided by the Board, in pursuance of which budgeting system is followed, which monitors, evaluates success and risk of banking business.

 

ii)          Formation of Local Boards-

 

Directors have power to appoint any person as a member of a Local Board of such Banking Company, along with fixing their remuneration, tenure of office etc. The Central Board of Directors are responsible for filling up any vacancies in the Local Board and remove any person from such Board if it is necessary.

 

iii)        Formation of By-laws-

 

From time to time the Directors vary or repeal by-laws for the regulation of business of the Bank, its Officers and servants.

 

iv)        Formation of Bank Policies-

 

The Directors formulate and approve loan and recovery policies, investment policies, management policies, policy on introduction of Technology to banking system[3] etc. According to the Report of RBI 2001 mentioned above, the Board should ensure that senior management implements policies that prohibits or strictly limit activities that diminish the quality of corporate governance, such as conflict of interests etc.

 

v)           Making Contracts-

 

Directors enter into negotiations and rescind and vary all contracts, and execute and do all such acts, deeds and things in the name of or on behalf of the Bank.

 

vi)        Supervision upon Investment and Loans-

 

The Board play an active role in analyzing different risks regarding credit, market, liquidity, operational to make profitable and safe investment for the benefit of the Bank. Directors provide guidance regarding lending of money and set up various safety protocols for recovery of loan.

 

vii)      Rewarding-

 

Directors reward employees by giving or allowing bonus, pension, gratuity or compensation to the Employee or to his widow, children, Dependents if that is necessary. Directors also can commission to any employee upon a particular business transaction or share the general profit of the Bank.

 

viii)   Sub-Delegate powers-

 

A Director can sub-delegate any or all his powers, authorities to officers or other managerial bodies for boosting efficiency in performance.

 

ix)        Attend Meetings-

 

Directors attend Board meetings to determine business strategies and annual operating plans and to monitor on an on-going basis the Bank’s performance.

 

x)           Ensuring Legal Requirements-

 

Directors ensure the business to be carried on according to the rules set by Government and the Central Bank of the Nation. Section 30 of the Banking Regulation Act, 1949 directs the banks to get audited its accounts periodically and submit its reports to RBI. The Directors play the most important role in this regard.

 

xi)        Advising-

 

Directors having specialized knowledge in economy and various banking fields provide advices and recommendations to its executives, shareholders and depositors on special occasion for mutual benefit and financial profits.

 

Conclusion:

 

The Directors of Banking Companies are subjected to various liabilities, their powers are not without restrictions. In India, the Reserve Bank of India, at different times analyze the banking sectors, analyze the prevailing issues and publish reports recommending the changes or upgrades that the Board of Directors are to introduce in their banking companies.

 

The Board usually comply with such recommendations as the RBI along with the Central Government of India has supervisory powers upon the Banks. RBI as per Section 35 of the Banking Regulation Act, 1949 can conduct inspection of any bank if it deems it to be necessary, can supersede the Board of Directors of any banking company[4] and appoint an Administrator to carry on the function of the Board, it can even appoint additional Director in times of need.

 

Therefore, the Directors have the absolute responsibility to carry out their function with utmost honesty and diligence. RBI has also issued a circular regarding Do’s and Don’ts for the Directors of Banks on March 9 of 1992 which is to be followed by all directors of every banking company in India.

 

Reserve Bank had earlier issued a Directive in the month of June of 2004 for the Banks in India which states to exercise due diligence before appointing them on the Boards of banks based on the ‘Report of the Consultative Group of directors of Banks / Financial Institutions’. Specific rules as laid down in the ‘fit and proper’ criteria are to be fulfilled by the directors as per the advice of RBI. It is therefore, undeniable that the Directors hold the most significant powers in a Banking Company and have the responsibilities and hence it is plausible for them to also be burdened with just liabilities.

 

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[1] AIR 1976 AP 126

[2] AIR 1961 Cal 188

[3] Report published by RBI in 2002 named ‘REPORT OF THE CONSULTATIVE GROUP OF DIRECTORS OF BANKS/ FINANCIAL INSTITUTIONS’

[4] As per Section 36ACA of the Banking Regulation Act, 1949