Finance 4 – Banking & Financial Institutions

MODULE 12
REGULATORY BODIES FOR BANKS AND NON-
BANK FINANCIAL INSTITUTIONS

OBJECTIVES:
At the end of this lesson, the students are expected to:
1 Discuss the role played by different government institutions/ agencies

TO DO LIST:
In order to successfully complete Module 12 Week 17 lesson, students are required to do the
following:
1. Join: the discussion on the topics about Regulatory Bodies For Banks and Non- Bank
Financial Institutions
2. Follow: Online Netiquette
3. Submit: the required output for this module on or before the given deadline.

LECTURE:

THE BANKING REGULATION ACT, 1949

Preamble of regulatory Act
• An Act to consolidate and amend the law relating to banking.
• WHEREAS it is expedient to consolidate and amend the law relating to banking.

Introduction
The Banking companies act, presently known as banking regulation act was enacted owing to
safeguard the interest of depositors, control abuse of power by some bank personnel controlling
the banks in particular and to the interest of Indian economy in general.
The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into
force w.e.f 16.3.49. Subsequently it was changed to Banking Regulations Act 1949 wef 01.03.66.

However, it should be remembered that this act does not supersede the provision of companies
act or any other law for the time being in force in respect of banking business.

Definition of banks
In India, the definition of the business of banking has been given in the Banking Regulation Act,
(BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a company which
transacts the business of banking in India.' Further, Section 5(b) of the BR 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 withdrawable, by cheque, draft, order or otherwise.'

This definition points to the three primary activities of a commercial bank which distinguish it from
the other financial institutions. These are: (i) maintaining deposit accounts including current
accounts, (ii) issue and pay cheques, and (iii) collect cheques for the bank's customer
Different provisions of Banking regulations Act

Applicability of the Banking Regulation Act, 1949

This Act applies to following categories of Banks:
1: Nationalized Banks
2: Non-Nationalized Banks
Cooperative Banks

Business of banking Companies Section 6(1) and 6(2) r. w. 56(b)

• Borrowing, raising or taking of money
• Giving advance
• Bills business
• L/C , Bank Guarantee, Indemnity
• Foreign exchange
• Providing safe deposit vaults
• Collecting and transmitting money
• Managing, selling and realizing any property that may come into the possession of the bank in
satisfaction or part satisfaction of any of its dues
• Acquiring, holding and dealing with any property or any right, title or interest in any such property
that may form the security or part of the security for any loans or advances or which may be
connected with such security
• Undertaking and executing trusts
• Acquiring, constructing, maintaining and altering of any building for the purpose of the bank
• Acquiring and undertaking the whole or part of the business of any person or bank / company if
its nature of business is as per the allowed business for the bank
• Doing all such other things as are incidental or conducive to the promotion or advancement of
the business of the bank
• Any other business the Central Govt. may by notification specify as an allowed business
• Banks are prohibited to do any other business

Use of words bank, banker, banking or banking company

(1) No company other than a banking company shall use as part of its name 15[or, in connection
with its business] any of the words bank, banker or banking and no company shall carry on the
business of banking in India unless it uses as part of its name at least one of such words.
(2) No firm, individual or group of individuals shall, for the purpose of carrying on any business,
use as part of its or his name any of the words bank, banking or banking company.
(3) Nothing in this section shall apply to-
(a) a subsidiary of a banking company formed for one or more of the purposes mentioned in sub-
section (1) of section 19, whose name indicates that it is a subsidiary of that banking company;
(b) any association of banks formed for the protection of their mutual interests and registered
under section 25 of the Companies Act, 1956 (1 of 1956).]

Applicability against other laws

• Provisions of the Banking regulation Act, 1949 are not in substitution of other laws applicable,
unless otherwise expressly said (Section 2 sub 56 (b)
• Act is not applicable to
– 1 Primary Agricultural Society
– 2 Co-operative Land Mortgage Bank
– 3 Any other co-operative society except as provided by Sec. 56 (Section 3)

Banking Policy
“Banking Policy” means policy specified by RBI from time to time in the interest of
-Banking system
-Monitory stability
-Sound economic growth
-Interest of depositors
-Volume of deposits and other resources of the bank
-Efficient use of the deposits and resources

Cash Reserve (CRR) Section 18 r. w. 56

Every bank is required to keep cash reserve, with itself or by way of balance in the current account
with RBI or Central / District Co-operative Bank or net balance in all such way, of minimum
prescribed % amount of its DTL as of last Friday of fortnight
A return about this has to be submitted to RBI before 15thof each month about alternate Friday

SLR (Statutory Liquidity Ratio)

Bank shall maintain unencumbered approved securities, valued not exceeding the current market
price, or an amount which shall not be less than 24% of the total of its demand and time liabilities
(DTL)

Restrictions on loans and advances

• — (1) Notwithstanding anything to the contrary contained in section 77 of the Companies Act,
1956 (1 of 1956), no banking company shall,—
• (a) grant any loans or advances on the security of its own shares, or—
• (b) enter into any commitment for granting any loan or advance to or on behalf of—
• (i) any of its directors,
• (ii) any firm in which any of its directors is interested as partner, manager, employee or guarantor,
or
• (iii) any company [not being a subsidiary of the banking company or a company registered under
section 25 of the Companies Act, 1956 (1 of 1956), or a Government company] of which 61[or the
subsidiary or the holding company of which] any of the directors of the banking company is a
director, managing agent, manager, employee or guarantor or in which he holds substantial
interest, or
• (iv) any individual in respect of whom any of its directors is a partner or guarantor

Licensing of banking companies

(1) Save as hereinafter provided, no company shall carry on banking business in India unless it
holds a license issued in that behalf by the Reserve Bank and any such license may be issued
subject of such conditions as the Reserve Bank may think fit to impose.]
(2) Every banking company in existence on the commencement of this Act, before the expiry of
six months from such commencement, and every other company before commencing banking
business 69[in India], shall apply in writing to the Reserve Bank for a license under this section.

Power to publish information

The Reserve Bank or the National Bank, or both, if they consider it in the public interest so to do,
may publish any information obtained by them under this Act in such consolidated form as they
think fit.

Power of the Reserve Bank to give directions

(1) Where the Reserve Bank is satisfied that—
(a) in the [public interest]; or (aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the
interests of the depositors or in a manner prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company generally,
it is necessary to issue directions to banking companies generally or to any banking company in
particular, it may, from time to time, issue such directions as it deems fit, and the banking
companies or the banking company, as the case may be, shall be bound to comply with such
directions.
(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel
any direction issued under sub-section (1), and in so modifying or cancelling any direction may
impose such conditions as it thinks fit, subject to which the modification or cancellation shall have
effect.

Amendments of provisions relating to appointments of managing directors, etc., to be

subject to previous approval of the Reserve Bank.
• no amendment of any provision relating to the maximum permissible number of directors.
• no appointment or re-appointment or termination of appointment of chairman.
• Further powers and functions of Reserve Banks.
• 1. (a) caution or prohibit banking companies or any banking company in particular against
entering into any particular transaction or class of transactions, and generally give advice to any
banking company;
• (b) on a request by the companies concerned and subject to the provision of section 149, assist,
as intermediary or otherwise, in proposals for the amalgamation of such banking companies;
• (c) give assistance to any banking company by means of the grant of a loan or advance to it
underclause (3) of sub-section (1) of section 18 of the Reserve Bank of India Act, 1934 (2 of
1934);
• (2) The Reserve Bank shall make an annual report to the Central Government on the trend and
progress of banking in the country, with particular reference to its activities under clause (2) of
section 17 of the Reserve Bank of India Act, 1934 (2 of 1934), including in
such report its suggestions, if any, for the strengthening of banking
business throughout the country.
•(3) The Reserve Bank may appoint such staff at such places as it
considers necessary for the scrutiny of the returns, statements and
information furnished by banking companies under this Act, and generally
to ensure the efficient performance of its functions under this Act.

Certain provisions of the Act not to apply to certain banking companies.

(1) The provisions of section II, sub-section (1) of section 12, and sections
17, 18, 24 and 25 shallnot apply to a banking company—
• (a) which, whether before or after the commencement of the Banking
Companies (Amendment) Act, 1959 (33 of 1959), has been refused a
license under section 22, or prohibited from acceptingfresh deposits by a
compromise, arrangement or scheme sanctioned by a court or by any
order made in any proceeding relating to such compromise, arrangement
or scheme, or prohibited fromaccepting deposits by virtue of any alteration
made in its memorandum; or
• (b) whose license has been cancelled under section 22, whether before
or after the commencement of the Banking Companies (Amendment) Act,
1959 (33 of 1959).
• (2) Where the Reserve Bank is satisfied that any such banking company
as is referred to in subsection (1) has repaid, or has made adequate
provision for repaying all deposits accepted bythe banking company, either
in full or to the maximum extent possible, the Reserve Bank may, bynotice
published in the Official Gazette, notify that the banking company has
ceased to be a banking company within the meaning of this Act, and
thereupon all the provisions of this Act applicable to such banking company
shall cease to apply to it, except as respects things done oromitted to be
done before such notice.

CONTROL OVER MANAGEMENT

36AA. Power of Reserve Bank to remove managerial and other
persons from office. (a)36AAA. Supersession of Board of directors
of a multi- State co-operative bank. (b)36AAB. Order of winding up
of multi-State cooperative bank to be final in certain cases
(c)Reimbursement to Deposit Insurance Corporation by liquidator
or transferee bank 36AB. Power of Reserve Bank to appoint
additional directors,
36AC. Part IIA to override other laws.
36AD. Punishments for certain activities in relation to banking companies.

SUSPENSION OF BUSINESS AND WINDING UP OF BANKING COMPANIES

High Court defined.
Suspension of business.
Winding up by High Court.
Court liquidator.
Reserve Bank to be official liquidator.
Application of Companies Act to liquidators.