BANKING REGULATION ACT 1949

What is banking regulation act 1949?

The Banking Regulation Act, 1949 is a law. It regulates the functioning of

banks and provides details on several aspects including licensing, management,
and operations of banks in India. It had been passed as the Banking Companies
Act, 1949 and came into force from March 16, 1949. Further the Banking
Companies Act 1949 had been changed to the Banking Regulation Act 1949
and being implemented as the same from March 1, 1966.

It extends to entire India. The provisions of this Act shall be in addition to, and
not, save as hereunder expressly PROVIDED, in derogation of the Companies
Act, 1956 and any other law for the time being in force.

There are a total of 55 Sections under the banking regulating act. Initially the
law was only applicable to banks, but after 1965, it was amended to make it
applicable to co-operative banks and also to introduce other changes. The act
provides a framework that regulates and supervises commercial banks in India.
This act gives power to the RBI to exercise control and regulate banks under
supervision.

Salient features of the Act

1. A comprehensive definition of banking so as to bring within the scope of

the legislation all institutions which receive deposits, repayable on
demand or otherwise for lending or investment.

2. Prohibition of non-banking companies from accepting deposits repayable

on demand.

3. Prohibition of trading to eliminate non-banking risks.

4. Prescription of minimum capital standards.

5. Limiting the payments of dividends.

 6. Inclusion the scope of legislation of banks registered outside the
provinces of India.

7. Introduction of comprehensive system of licensing of banks and their

branches.

8. Prescription of a special form of balance sheet and conferring of powers

on the Reserve Bank to call for periodical returns.

9. Inspection of books and accounts of a bank by Reserve Bank.

10.Empowering the central government to take action against banks

conducting their affairs in a manner detrimental to the interests of the
depositors.

11.Provision for bringing the Reserve Bank of India into closer touch with
banking companies.

12.Provision of an expeditious procedure for liquidation.

13.Bringing the imperial bank of India within the purview of some of the
provisions of the Bill.

14.Widening the powers of the Reserve Bank of India so as to enable it to

come to the aid of banking companies in times of emergencies.

15.Provision for the extension of the Act to acceding states.

Definition of Bank

The definition for banking is given by Section 5 (b) of the Banking Regulations
Act 1949. bank is a lawful institution that acts as deposit and lending. They
promote people who have excess money (saver) to deposit and earn an interest
rate and on the other hand, they promote loans for people who need money
(borrower) at an interest rate. So, the bank functions as an intermediary between
the saver and the borrower.
Definition of a Banker

It is stated under Section 3 of the Negotiable Instruments Act 1881, that the

term banker includes any person acting as a banker.  The banker is an individual
who is a dealer of capital or a money dealer.

Principal Provisions of Banking Regulation Act: 

1.Prohibited functions of Banks

According to Section 8 and 9, the banks cannot engage themselves in carrying

on the following activities:

1. No banking company shall directly or indirectly deal in the buying or

selling or bartering of goods, or engage in any trade.

2. No banking company shall buy or sell, or barter goods for others.

3. No banking company shall hold any immovable property howsoever

acquired for more than 7 years from the acquisition thereof. However,
it can hold any immovable property required for its own use.

2. Non-Banking Assets (Sec. 9):

According to Sec. 9 “A banking company cannot hold any immovable property,

howsoever acquired, except for its own use, for any period exceeding seven
years from the date of acquisition thereof. The company is permitted, within the
period of seven years, to deal or trade in any such property for facilitating its
disposal”. 

3. Management (Sec. 10):

Sec. 10(a) states that not less than 51% of the total number of members of the
Board of Directors of a banking company shall consist of persons who have
special knowledge or practical experience in one or more of the following
fields:
 (a) Accountancy; (b) Agriculture and Rural Economy; (c) Banking; (d)
Cooperation; (e) Economics; (f) Finance; (g) Law; (h) Small Scale
Industry.

Wholetime Chairman:

Not be adjudicated insolvent

Not be convicted for criminal offence

Be a managing agent or take remuneration in the for of commission or of a

share in the profits of company whose remuneration is excessive in the
opinion of RBI

4. Minimum Capital and Reserves (Sec. 11)

Sec. 11 of the Banking Regulation Act, 1949, provides that no banking

company shall commence or carry on business in India, unless it has minimum
paid-up capital and reserve of such aggregate value as is noted below:

(a) Foreign Banking Companies:

In case of banking company incorporated outside India, its paid-up capital and
reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in
Mumbai or Kolkata or in both, Rs. 20 lakhs.

(b) Indian Banking Companies:

In case of an Indian banking company, the sum of its paid-up capital and
reserves shall not be less than the amount stated below:

(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any
such place of business is in Mumbai or Kolkata or in both, Rs. 10 lakhs.

(ii) If it has all its places of business in one State, none of which is in Mumbai
or Kolkata, Rs. 1 lakh in respect of its principal place of business plus Rs.
10,000 in respect of each of its other places of business in the same district in
which it has its principal place of business plus Rs. 25,000 in respect of each
place of business elsewhere in the State. 

5. Capital Structure (Sec. 12):

According to Sec. 12, no banking company can carry on business in India,

unless it satisfies the following conditions:

(a) Its subscribed capital is not less than half of its authorised capital, and its
paid-up capital is not less than half of its subscribed capital.

(b) Its capital consists of ordinary shares only or ordinary or equity shares and
such preference shares as may have been issued prior to 1st April 1944.

(c) The voting right of any shareholder shall not exceed 5% of the total voting
right of all the shareholders of the company.

 6. Payment of Commission, Brokerage etc. (Sec. 13):

According to Sec. 13, a banking company is not permitted to pay directly or

indirectly by way of commission, brokerage, discount or remuneration on issues
of its shares in excess of 2.5% of the paid-up value of such shares.

Payment of Dividend:

According to Sec. 15, no banking company shall pay any dividend on its shares
until all its capital expenses (including preliminary expenses, organisation
expenses, share selling commission, brokerage, amount of losses incurred and
other items of expenditure not represented by tangible assets) have been
completely written-off.

7. Reserve Fund/Statutory Reserve (Sec. 17):

According to Sec. 17, every banking company incorporated in India shall,

before declaring a dividend, transfer a sum equal to 20% of the net profits of
each year (as disclosed by its Profit and Loss Account) to a reserve fund. The
Central Government may, however, on the recommendation of RBI, exempt it
from this requirement for a specified period.

8. Cash Reserve (Sec. 18):

Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if
Indian, maintain in India, by way of a cash reserve in Cash, with itself or in
current account with the Reserve Bank or the State Bank of India or any other
bank notified by the Central Government in this behalf, a sum equal to at least
3% of its time and demand liabilities in India.

9. Liquidity Norms (Sec. 24):

According to Sec. 24 of the Act, banking companies must maintain sufficient

liquid assets in the normal course of business. The section states that every
banking company has to maintain in cash, gold or unencumbered approved
securities, an amount not less than 20% of its demand and time liabilities in
India. This percentage may be changed by the RBI from time to time according
to economic circumstances of the country. 

10. Restrictions on Loans and Advances (Sec. 20):

After the Amendment of the Act, 1968, a bank cannot:

(i) grant loans or advances on the security of its own shares, and

(i i) grant or agree to grant a loan or advance to or on behalf of:

(a) any of its directors;

(b) any firm in which any of its directors is interested as partner, manager or
guarantor;

(c) any company of which any of its directors is a director, manager, employee
or guarantor, or in which he holds substantial interest; or
(d) any individual in respect of whom any of its directors is a partner or
guarantor.

11. Accounts and Audit (Sec. 29 to 34A):

The above Sections of the Banking Regulation Act deal with the accounts and
audit. Every banking company, incorporated in India, at the end of financial
year expiring a period of 12 months as the Central Government may by
notification in the Official Gazette specified, must prepare a Balance Sheet and
a Profit and Loss Account as on the last working day of that year or according
to the Third Schedule or as circumstances permit.

At the same time, every banking company, which is incorporated outside India,
is required to prepare a Balance Sheet and also a Profit and Loss Account
relating to its branch in India also.

According to Sec. 30 of the Banking Regulation Act, the Balance Sheet and
Profit and Loss Account should be prepared according to Sec. 29 and the same
must be audited by a qualified person known as auditor. It is needless to
mention here that every banking company must take previous permission from
RBI before appointing, re-appointing or removing any auditor.

POWERS OF RBI

 Power to issue license

 Power to determine the credit policy

 Power of inspection

 Power to issue directions

 Power to control management

 Power to advice banks

 Power to assist in proposals for amalgamation

 Power to receive and scrutinize the returns

 Power to grant Moratorium at time of reconstruction

 Power to appoint liquidator

 Power to give advice to central govt.

 Power to supersede the BOD