BANKING

REGULATION ACT
1949
 History of the Banking Regulation
Act, 1949
• The concept of banking started in India with the establishment of the Bank of Hindustan. Before

nationalisation took place in India, the banking system of India was more of a private nature. Banks were

struggling to keep their branches open.

• Low capital and reserves and greed for obtaining high profits became a reason for the failure of the banking

system. The banks were supervised under the Companies Act, 1913, but this Act was not sufficient to regulate

banks. The economy was not performing well, and this started to damage the banks. Also, the concept of

banks was mostly used by the upper-class people. Frauds were also one of the reasons for the decline in the

usage of banks. This gave a need to regulate the banking system of India. As a result, the Banking Regulation

Act was introduced in 1949. It was initially applicable to banking companies, but after the Amendment in

1965, the Act was also applicable to cooperative banks .

Objectives of the Banking Regulation Act, 1949

• To meet the demand of the depositors and provide them security and
guarantee.
• To provide provisions that can regulate the business of banking.
• To regulate the opening of branches and changing of locations of
existing branches.
• To prescribe minimum requirements for the capital of banks.
• To balance the development of banking institutions.
Scope and applicability of the Banking Regulation Act,
1949

• The sections under this Act are to be interpreted along with the
sections of the Companies Act, 1956, or any other laws prevalent in
the banking system. This Act applies to banking companies and
cooperative banks. It will not apply to a primary agricultural credit
society or a cooperative land mortgage bank, or any other co-
operative society, except mentioned in Part V of the Act.
Features of the Banking Regulation
Act, 1949
• Non-banking companies are forbidden to receive money deposits that
are payable on demand.
• Non-banking risks are reduced by prohibiting trading by banking
companies.
• Maintaining minimum capital standards.
• Regulation on the acquisition of shares of banking companies.
• Power of the Central Government to make schemes for the banks.
• Provisions regarding liquidation proceedings for banking companies.
Important provisions of the Banking Regulation Act,
1949

• The Act has defined some terms such as banking, banking company,
branch office, etc.
• A banking company means a company that conducts banking business
in India.
• Banking means to accept for lending or investment of deposits of
money from the public which can be repaid on demand.
• Subsidiary banks have the same meaning as given under the State
Bank of India (Subsidiary Banks) Act, 1959.
• A secured loan or advance means an advance or a loan secured
against the security of assets.
Business which can be undertaken by the banking
companies

• Under Section 6(1), a banking company may be involved in the

business of borrowing or lending money; buying or selling bills of
exchange, promissory notes, coupons, drafts, bills of lading, railway
receipts, warrants, debentures; buying or selling of foreign exchange;
dealing stock, funds, shares, debentures, bonds; carrying on agency
business such as clearing and forwarding of goods; conducting the
business of guarantee and indemnity, etc.
Prohibition of trading

• Trading is prohibited under Section 8 of this Act.

• No banking company shall directly or indirectly deal in the buying or
selling, or bartering of goods except when it is selling the goods kept
in its security. The bank should also not engage in any trade or buy,
sell or barter goods except for bills of exchange received due to
collection or negotiation.
Management of bank

• The bank should not employ or be employed by the managing partner

as stated under Section 10 of the Act.
• The bank should also not employ a person who has been adjudicated
insolvent or whose remunerations depend on the profits of the
company. At least 51% of the total members of the board must have
professional experience in matters such as accountancy, agriculture,
rural economy, banking, cooperation, economics, finance, law, small-
scale industry, etc. The term of the office of the director should not be
more than eight years.
Minimum paid-up capital and
reserves
• Section 11 states that if a banking company is incorporated outside
India then the total value of its paid-up capital should be more than
fifteen lakhs and if it has a place of business in Calcutta or Bombay or
both, then it should be more than twenty lakhs.
• The banking company must deposit twenty percent of its profit for
the year. If the company is incorporated in India and if it has branches
in different states, then the paid-up capital is five lakhs of rupees, and
if the place of business is situated in the city of Bombay or Calcutta or
both, then ten lakhs of rupees must be the minimum paid-up capital.
• If the company has all its branches in the same state none of which is
situated in the city of Bombay or Calcutta, then the paid-up capital
must be one lakh rupees concerning its principal place of business,
plus ten thousand rupees in respect of each of its other branches
situated in the same district in which it has its principal place of
business, plus twenty-five thousand rupees in respect of each branch
situated elsewhere in the state otherwise than in the same district.
• The subscribed capital of the company should not be less than one-
half of the authorised capital, and the paid-up capital should not be
less than one-half of the subscribed capital. The banking company
cannot create any charge on unpaid capital. The company shall
transfer every year at least twenty percent of its profits to the Reserve
Fund. The banking company must inform RBI of the appropriation of
the Reserve Fund within twenty-one days from the date of
appropriation.
Limitations on nature of subsidiary companies

• A banking company should not form a subsidiary company unless the

formed company is for an undertaking of a business or written
permission was obtained from the Reserve Bank of India. The banking
company can hold shares of an amount of more than thirty percent of
the paid-up share capital of the company or its own paid-up capital.
Licensing of banking companies

• No banking company can carry out business in India unless it has

obtained a license from the RBI. RBI can hold the inspection of books
before granting the license. RBI can also cancel the license if the
company stops carrying on banking business in India.
Opening of new and transfer of existing branches

• Every banking company must obtain the permission of RBI before

opening a new branch or transferring the existing branch to a
different city, town, or state. No banking company incorporated in
India shall open a new branch outside India without the prior
permission of RBI. However, a new branch can be opened for a
temporary period not exceeding one month.
Accounts and balance-sheet

• The banking companies shall prepare a balance sheet and profit and
loss account on the last working day.

• Inspection
RBI can cause the inspection of the banking company and must state its
report to the company. The directors of the banking company must
submit all books, accounts, or documents for inspection.
Power of RBI to issue directions

• RBI may frequently issue directions to the banking company if it is

satisfied that the directions are in the interest of the public or to
prevent the banking company from detrimentally conducting
business.
Restriction of certain activities by the banking
company

• The banking company cannot obstruct any person from entering its
place of business. It cannot hold anything violent in the place of
business. The banking is liable under Section 36AD for violation of the
above-mentioned activities.
Powers and functions of RBI

• Section 36 mentions the powers of RBI. The Reserve Bank may

prohibit banking companies from entering into a particular
transaction and can advise the banking company. It can also assist the
banking company by granting loans or advances under Section 18. It
can direct the banking company to call for a meeting of its directors to
discuss the matters of the company. It can also appoint officers to
observe how the affairs of the banking company are conducted.
Suspension of business

• If the banking company for a temporary period is unable to meet its

obligation, it can apply for a moratorium to the High court. The High
court can grant the moratorium and stop the proceedings for a
temporary period as it deems proper. The period of the moratorium
shall not exceed six months. The banking company is only considered
valid if it has attached the report of the RBI stating that the banking
company will be able to pay its debts if the application is granted.
Payment of dividends

• The banking companies should only pay dividends after all the capital
expenses are paid up. It shall not pay the dividends until the
depreciation in the value of investments in approved securities or
investments in shares, debentures, or bonds are written off.
Reserve fund

• Every banking company must form a reserve fund and must transfer
at least twenty percent of its profit to the reserve fund. Each banking
company must report to the Reserve Bank if it has appropriated any
funds from the reserve fund.
Power of Central Government in respect of liquidation
of companies

• The Central Government may order the RBI to initiate insolvency

proceedings if the banking companies have committed a default
under the Insolvency and Bankruptcy Code, 2016.
Offences and punishment under the Banking
Regulation Act, 1949

• Various provisions are mentioned in the Act which states that a person
will be liable for imprisonment and fine if he does any act which is in
contravention with the Act. It is stated under Section 46 as below:
• A person will be liable for imprisonment of up to three years and a fine
which may extend up to one crore rupees if he has misrepresented any
facts or presented the wrong acts intentionally.
• A person will be liable to a fine of up to twenty lakh rupees and up to
fifty thousand rupees in case of a continuing offence if he fails to
produce the documents or books or refuses to answer the questions
asked by the inspection officer.
• All the directors of the banking company will be held liable and will be
imposed a fine of twice the amount of the deposits made with the
banking company if the banking company has illegally received any
deposit.
• The directors or the secretary will be punished if the company has
caused a default or the default occurred due to the negligence of the
director.
Shortcomings of the Banking Regulation Act, 1949

• The Banking Regulation Act has less scope on public sector

banks. There are no strict provisions for non-performing assets (NPA),
and this gives a chance to the defaulters to escape from the situation.
Some provisions of this act can hamper the working of the banks.
Amendments to the Banking Regulation Act, 1949

• Banking Laws (Application To Co-operative Societies) Act, 1965

• Initially, the Banking Regulation Act was passed as Banking Companies
Act, 1949. But with the introduction of the
Banking Laws (Application To Co-operative Societies) Act, the word
Companies was omitted and the word Regulation was added to the
title of the Banking Regulation Act, 1949. The Act also added a new
Section called Section 56 as Part V after Part IV in the Banking
Regulation Act. This section will apply to co-operative societies
subjected to some modifications.
Banking Regulation (Amendment) Act, 2020 (Act 39 of
2020)

• This Act came into force on September 29, 2020. The Banking
Regulation Act will not be applied to a cooperative society whose
main business is providing long-term financial support for agricultural
development. The amendment also mentioned that the societies
should not use the words ‘bank’, ‘banker’, or ‘banking’ in their name
or connection with their business. A cooperative bank may issue
equity shares, preference shares, or special shares on face value or at
a premium to its members or to any other person residing within its
area of operation after obtaining prior approval from the Reserve
Bank of India.
• After the amendment, RBI may suspend the Board of Directors of a
multi-cooperative bank for five years to protect the depositors. This
amendment omitted some provisions like granting of unsecured loans
or advances to its directors, and to private companies where the
bank’s directors or chairman is an interested party, opening a new
place of business, or changing the location of the cooperative bank
outside of the city, town or village in which it is currently located
without permission from RBI, etc.