BANKING REGULATION ACT

Banking Regulation Act cam into effect on 16 march 1949

with a purpose to empower RBI to regulate banks in India.
Applicable all over India to all banks except PACS and co-op land
mortgage banks.
•Sec 5 (b) of the bank defines the term banking.
•U/S 49A only banks can accept deposits
withdrawable by cheques. Exception to this rule
is post offices who accept small savings.
•Sec 5a. Definition of approved securities: Securities in
which a trustee is permitted to invest funds u/s 20 of
Indian Trust Act.
•Definition of secured advance Sec.5 n: Advances
where the market value of securities [both prime &
collateral] at any time is not less than outstanding.
• Unsecured advance: an advance not backed by any
security or where the value of security is not more
than 10% of the outstanding.
• AUTHORISED BUSINESS OF A BANKING COMPANY
• PRIMARY activities: I]Accepting deposit II] Lending money
III] Investing in financial instrument
• SECONDARY ACTIVITIES: Bank can I]act as agent ii] a trustee
iii] a dealer in bullion/FX/securities iv] issuer of LG/LC v]
provider of safe custody /SDL and vi]underwriter for the
issue of shares/ securities Sec [6]
• PARA BANKING ACTIVITIES: 1] leasing & hire purchase2]
factoring 3]insurance 4] merchant banking 5]mutual fund 6]
trading in shares/ securities activity …. sec 6(o)
•THE USE OF WORD BANK: No company other than
banking co. is Permitted to use as part of it’s name
words Bank/ Banker/ Banking. …..Sec(7)

•A BANK CAN NOT TRADE IN GOODS: A bank can not

directly or indirectly buy , sale, barter goods except
those kept as security. ........ Sec.8
•A BANK CAN NOT HOLD IMMOVABLE PROPERTY: Bank
can hold only cash,,bank balance, financial assets. To
 own movable &immovable property except those for
realisation.
•Banks are permitted to hold such non banking
immovable property maximum for a period of seven
years from date of acquisition & can be extended for
another period of 5 years. For PSBs, can be for more
period..….. sec 9
• MANAGEMENT OF BANK: appointment of Chairman &
managing Director can not exceed more than 5 years. [sec
10]
• PVT sector banks to appoint chairman/ managing
director/CEO with RBI’s approval.
• Age of any whole time director/ MD of any company(Banking
Co. Also) not<21 years &not > 70 years. (Companies act
2013)
• COMPOSITION OF BOARD OF DIRECTORS: Not less than 51%
of the directors of the bank must have special knowledge /
practical experience in the field of banking,agriculture,
accountancy, economics etc. A director can’t hold office for >
8 years. ….sec 10A
• Minimum Paid up capital & Reserve Requirement: every
banking co. To have minimum paid up capital Rs. Five lakh.
For formation of pvt sector bank, minimum paid up capital to
be five hundred crore.
• A small finance bank, even a payment bank should have 100
cr. This section is not applicable to PSBs. [sec11]
•
CAPITAL STRUCTURE: Pvt sector bank’s capital
structure should be 4:2:1 w.r.t authorized capital,,
subscribed capital and paid up capital. ……. sec 12
•Apointment of directors:no body can act as director
for more than one bank.
•
•A bank can not have 3 directors who are the director
in other companies.
Transfer of profit to reserve fund: Before declaring any
dividend, a bnking company is required to transfer not
less than 25% of profit made during the year to
reserve fund. [sec17]
•
•RBI’s approval necessary before making appropriation
from reserve fund or any other reserve. …. sec 17(2)
INVESTMENT IN SHARES OF A COMPANY AND
ADVANCE AGAINST IT’S SHARES:
•
No banking company shall hold shares in any company,
as pledge, mortgagee, or absolute owner of an amount
exceeding 30% of the paid up capital of that company
or 30% of its own paid-up capital and reserve
whichever is less……[sec 19[2]
• Advance against its own share: Banks can not grant ant
loan/ advance against its own share. viz. HDFC Bank can not
grant loan against its own share. SEC 20[a]
• Advance to Directors: No banking company shall grant any
loans or advances to its directors or directors of its
subsidiaries or their relatives. However loans can be granted
against govt security, LIC policy or fixed deposit of banks.
Sec [20]
• Power of Reserve Bank to control advances by banking
companies. Viz purpose for which loan can’t be granted,
margin required, maximum amount of loan, rate of interest.
This is called selective credit control. Sec 21
• Rates of interest charged by banking companies not to be
subject to scrutiny by courts. Section 21A.
• LICENSING OF BANKS: No company shall carry on
banking business in India unless it holds a licence
issued in that behalf by the Reserve Bank and any
such licence may be issued subject to such conditions
as the Reserve Bank may think fit to impose. Sec
[22]
CLASSIFICATION OF CENTRES AS PER RBI GUIDELINE:
• 4 types of centres: 1] Rural centre: population not exceeding
10,000 2] semi urban: > 10000 but <1 lakh 3] Urban
centre: Population > 1 lakh but < 10 lakh 4] Metro centre:
population > 10 lakh.
• STATUTORY LIQUIDITY RATIO:(SLR) Every scheduled and
nonscheduled bank is required to maintain SLR. Every banking
company, in addition to the cash reserve which it is required to
maintain under section 18, shall maintain in India, liquid assets,
the value of which shall not be less certain percentage [0 to 40%]
of the total of its Net demand and time liabilities in India as on the
last Friday of the second preceding fortnight. Liquid assets will be
in the form of a]cash b] gold c] unencumbered SLR security.
• If a bank fails to maintain SLR, it has to pay penalty @bank rate plus
3%
• TRANSFER OF UNCLAIMED DEPOSITS: Within thirty days after the close of
each calendar year, transfer and submit a return in the prescribed form and
manner to the Reserve Bank as at the end of such calendar year of all
accounts 1[in India] which have not been operated upon for ten years 2[***]:
Provided that in the case of money deposited for a fixed period the said term
of ten years shall be reckoned from the date of the expiry of such fixed period:
3[Provided further that every RRBshall also furnish a copy of the said return to
the National Bank.] sec 26
• The unclaimed
deposits transferred to RBI will be credited to DEPOSITORS
EDUCATION AND AWARENESS FUND. RBI pays interest on such balance.
• sec 26A).
•PREPATION OF BALANCE SHEET BY A BANK: sec 35
 Bank is required to prepare its B/S & P&L account as
per format “A” and “B”given in Third Schedule of the
ACT as amended in 1991.
•The B/S has 16 schedules, it is to be signed by CMD
and atleast three Directors. 3 copies of the B/S to be
submitted to RBI within 3 months of the B/S [Sec.
31]
RBI’s POWER TO INSPECT BANKs: U/S 35

• RBI conducts inspection of banks under Annual Financial

system (AFI). on the basis of AFI, RbI givs rating to banks which
is based on 5 parameters known as CAMELS .These parameters
ARE 1] C stands for capital adequacy 2] A stands for asset
quality 3] M stands for management 4] E stands for Earnings 5]
L stands for liquidity 6] S stands for systems &control
• RBI puts the bank under prompt corrective action [PCA] to
protect the bank from failure when a bank reaches a trigger
 point. These trigger points are a] CRAR becomes < 9% b] Net
NPA goes beyond 10% c]Return to asset becomes <0.25%
RBI’s POWER TO INSPECT BANKs: U/S 35
• RBI also asks banks to conduct a]concurrent audit b]
Forensics audit c] Information system audit d] Revenue audit

• Directives to Banks [Sec 35A] RBI issues directives to banks

on a] KYC guidelines b] clean note policy c]Banking
Ombudsman scheme d] Interest on deposit& advances e]
use of note counting machine at branches.
•U/S 21 and 35A RBI asks branch to round off the to
nearest rupee.

•ACQUISITION OF BANKING COMPANY: GOI can acquire

any with prior consultation with RBI. (Sec. 36 AE to
36AJ)
• NOMINATION OF DEPOSIT ACCOUNT, SAFE CUSTODY AND SAFE
DEPOSIT LOCKERS.
• - Sec 45 ZA- 45 ZB provide nomination facility to the deposit account.
• -sec 45 ZC to ZD provide nomination facility for articles kept in safe
custody.
• -sec 45 ZE to ZF provide nomination facility for articles kept in safe
deposit Locker.