BANKING REGULATION ACT - 16th march 1949

An Introduction:

 Till 1949, There was no separate Act for Banking in India. So it was controlled
by Indian Companies Act 1956.
 The Central Banking Enquiry Committee recommended the need of a separate
legislation to control banks due to mushroom growth of banks with inadequate
capital, dishonest management, speculative business etc etc..
 Accordingly a bill was introduced in parliament in March 1948.

 It was Passed in parliament in 1949 and The Banking Regulation Act 1949
came in to force from 16th March 1949.
 The Act was originally in force from 16 March 1949 as the Banking Companies
Act, 1949. It was amended and renamed as Banking Regulation Act, 1949 and
extended to the cooperative banks ( Under section 56) from 1 March 1966 as the
Banking Regulation Act, 1949

Objectives of the Banking Regulation Act 1949:

1) To safeguard the interest of depositors;

2) To develop banking institutions on sound lines

and
3) To attune the monetary and credit system to the larger interests and priorities of the
nation.

Important features of Banking regulation Act

1) The Banking Regulation Act, 1949 is a legislation in India that regulates all banking
firms in India.

2) The Act provides a framework using which commercial banking in India is

supervised and regulated. The Act supplements the Companies Act, 1956.

Important Provisions of Act

1. Definition of Banking.
2. Form of Business.
3. Provision of Capital
4. Management
5. Maintenance of Liquid Assets.
6. Licensing of Banks.
7. Opening of New Banks.
8. Provision Regarding Loans and Advances.
9. Inspection of Banks.
10. Powers of the Reserve Bank of India.
11. Returns to Be Submitted.
12. Acquisition of Business.
13. Mergers/Amalgamations.
14. Winding up of Banking Companies.

Definition of Banking in the Act

Banking:

Sec 5 (b) of the Act defines Banking as, “Accepting for the purpose of lending or
investment, of deposits of money from the public, repayable on demand or
otherwise, and withdraw able by cheque , draft, order or otherwise.”

Banking Company:

Sec 5 (c) of the Act defines Banking as,

“A company which transacts the business of banking in India.”

Business of banking under Act

Banks can only do the business which is mentioned u/s 5 (c) and 6 of the Act.

It consist of :-

1. Main Functions/Business.

2. Subsidiary functions/Business.

Main Functions/Business:
1. The borrowing , raising or taking up money.

2. The lending of money with or without security.

3. The granting and issuing of letters of credit or various kinds, travelers cheque etc.
4. Drawing, making, accepting, discounting, buying, selling, collecting, and dealing in
bills of exchange, hundies, promissory notes, coupons etc.

5. Buying, selling, and dealing in bullion/species.

6. The buying and selling of foreign exchange including foreign bank notes.

7. The acquiring, holding, issuing on commission , underwriting and dealing in stock,

funds, shares, debentures, bonds, securities, and investment of all kinds.
 8. The purchasing and selling of bonds, scripts, and other forms of securities on
behalf of constituents or others.

9. The negotiating of loans and advances.

10. The receiving of all kinds of loans, scripts or valuables or deposit or for safe
custody or otherwise.

11. The providing of safe deposit vaults.

12. The collecting and transmitting of money and securities.

Subsidiary Functions/Business:

1. It may act as an agent of the government, local authority or person.

2. It may contract for public and private loans and negotiate and issue the same.

3. Effecting, insuring, guaranteeing, underwriting, and participating in managing and

carrying out of any issue, public or private.

4. Carrying on agency business of any description.

5. Carrying on and transacting every kind of guarantee and indemnity business.

6. Managing, selling and realizing any property which may come into its possession
in satisfaction of any of its claims

7. It may acquire hold and deal with any property or any right or title or interest in any
such property which may form the security for any loan or advance.

8. It may undertake and execute trusts.

9. it can undertake the administration of estates as executor, trustee or otherwise.

10. It may establish, support and aid associations , institutions , funds , trusts etc for
the benefits of its present and past employees and may grant money for charitable
purposes.

11.It may acquire , construct and maintain any building for its own purposes.

12. It may sell , improve , manage , develop , exchange , lease , mortgage, dispose of
or turn into account or otherwise deal with all or any part of the property and rights of
the company.

13. It may acquire and undertake the whole or any part of the business of any person
or company, when such business is of a nature described in section 6 of the Act.

14. It may do all such things which are incidental or conductive to the promotion or
advancement of the business of the company.
 15. Any other business specified by the central Government as the lawful business of
a banking company.

Licensing of banks

 Every banking company in India should obtain a license from the RBI before
commencing the business. It will grand license only after the detailed
inspection considering so many factors.
 It should obtain prior permission from Reserve Bank of India for opening
new place of business either in or abroad and also for changing the location.

KINDS OF BUSINESS CANNOT BE DONE

1. A bank cannot carrying on trading activities. (Sec 8)

2. It cannot hold any immovable property except for its own use exceeding 7 years.
(Sec 9)
3. Prohibition of employment of managing agents and restrictions on certain forms
of employment .(Sec 10)

THE ACT GIVES THE RESERVE BANK OF INDIA (RBI) TO POWER TO

1) License banks.

2) Have regulation over shareholding and voting rights of shareholders.

3) Supervise the appointment of the boards and management

regulate the operations of banks; lay down instructions for audits

4) Control moratorium, mergers and liquidation; issue directives in the interests

of public good and on banking policy,

5) Impose penalties.

Powers of the Reserve Bank According to Banking regulation Act.

1. Election of New Directors.

2. Maintaining Cash Reserves.
3. Power to issue license to new banks.
4. Power to cancel license.
5. Power to give permission for starting new branches.
6. Power of inspection.
7. Power to issue directions.
8. Power to control management.
9. Power to advice banks.
10. Power to call for information.
11. Power to grant moratorium.
12. Power to control advances.
13. Power to appoint liquidator.

MANAGEMENT OF BANKING COMPANY

Management: According to Sec 10 A, it has to constitute the board of directors in

such a way that not less than 51 % of the total number of members consist of, a) have
special knowledge or practical experience in Accountancy, agriculture , rural
economy, banking, economics and law. At least 2 of them have in cooperation and
small scale industry. b) they shall not have any substantial interest or connection with
anyone of any company or firm. Any director of the company can hold the office
continuously for the period not exceeding 8 years.

Chairman: It should have a Director as its whole time or part time chairman of
the banking company. He can hold the office for a period not exceeding 5 years.

management of banking company Statutory liquidity ratio: According

to Sec 24, Every banking company in India is required to maintain cash, gold, or
unencumbered approved security, valued at a price not exceeding the current market
price and not less than 23 % of its time and demand liabilities.

Cash Reserve: Sec 18 of the Act lays down that every banking company should
maintain 4.25% of total of its time and demand deposits in the form of cash reserves
with RBI.

Difference Between SLR and CRR: SLR restricts the bank’s leverage in
pumping more money into the economy. On the other hand, CRR, or cash reserve
ratio, is the portion of deposits that the banks have to maintain with the Central Bank
to reduce liquidity in economy. Thus CRR controls liquidity in economy while SLR
regulates credit growth in the Economy. The other difference is that to meet SLR,
banks can use cash, gold or approved securities whereas with CRR it has to be only
cash. CRR is maintained in cash form with central bank, whereas SLR is money
deposited in govt. securities.CRR is used to control inflation. Provision of liquidity