Banking Regulation Act

1949 (AACS)
Compiled and presented
by

B.N.Sampath Kumar
Retd AGM, NABARD
Bangalore
***************
09/11/08 1
We have different types of banks in the country –

 Commercial banks, cooperative banks, Regional

Rural banks and Private sector banks.
 Who give guidance to those banks, who controls
them, who regulates them?

 The Reserve Bank of India

 Who has given powers to control those banks?

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Banking Regulation Act 1949 (AACS)
Powers of RBI
The BR Act and the RBI Acts give the supervisory
and regulatory powers to the RBI over the
functions of all types of banks in India.
Banking Regulation Act 1949
The Banking Regulations Act 1949 was enacted
on 16 March 1949, to consolidate the regulatory
laws relating to banking and also to define the
transactions that can be carried out by
commercial banks in the country and to bring all
commercial banks into its fold.
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Though the BR Act was in existence, it was not
applicable to the Cooperative banks for a long
time

But when the deposits started increasing in the

Coop sector, BR Act was made applicable to
Coop banks also, with effect from1 March 1966
with a nomenclature - BR Act 1949 (As
Applicable to Coop Societies).

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This Act gives supervisory and regulatory powers
to RBI over the Coop banks .
But basically all cooperative banks are registered
under the Cooperative Societies Act and
therefore the powers regarding incorporation,
management, elections to the Board of
Directors still rest with the Registrar of Coop
societies of the State or Centre concerned.
So all cooperative banks come under dual control
ie RBI and RCS.

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Objectives of the Banking Regulation Act
broadly are:
are:

 to safeguard the interest of depositors;

 to develop banking institutions on sound lines;
and
 to attune the monetary and credit system to the
larger interests and priorities of the nation.

Let us discuss some of the important provisions

of BR Act 1949 (AACS).
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The Act was originally in force from 16 March
1949 as the Banking Companies Act, 19491949.. It
was amended and renamed as Banking
Regulation Act, 1949 and extended to the
cooperative banks from 1 March 1966 as the
Banking Regulation Act, 1949 (As Applicable to
Cooperative Societies) [B R Act, 1949 (AACS)].
Sec 56 :
BR Act was made applicable to Cooperative
societies - under the provision of Sec 56.
As per this, a Cooperative Bank means a SCB,
CCB and Primary Coop Bank.
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Important provisions of BR Act 1949 (AACS)
Sec 1 :The Act extends to whole of India and
wef. 01
01..03.
03.1966

Sec 3 : Nothing in this Act shall apply to certain

Co--ops such as :
Co
a) PACS,
b) LDB and
c) Other Coop Societies except in the manner and
to the extent specified in the Act

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What is banking ?
Definition of Bank
As per Sec 5(1)(b) of the Act –
Banking is the :
 the 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.

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 “Sec 5(1)(c) – Banking company means
 any company which transacts the business of
banking in India”

A cooperative bank is
 a State Cooperative Bank,
 a Central Cooperative Bank or
 a Primary Cooperative Bank - Section 5 (cci
cci))

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. Some more Definitions are :
 A Primary Cooperative Bank is:
 A cooperative society (other than a PACS)
which accepts deposits from the public i.e.,
members and non-non-members and utilizes these
for lending, will be deemed to be transacting
banking business primarily in banking business
 with capital and reserves of not less than Rs.1
lakh &
 whose byelaws do not permit admission of any
other society as a member.

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Essential characters of a bank are :
Acceptance of deposits from the public on different types
of accounts
Allowing withdrawals of these deposits by cheques,
cheques,
drafts, orders or otherwise
Utilisation of deposits in hand for the purpose of lending
or investments
Performance of other activities called subsidiary
services, in addition to the principal activities of
receiving of deposits and lending of funds
Performance of banking business as the main business
Using the term Bank, banker or banking company as
part of its name
What sorts of business it can conduct ?...........
Sec 6 – deals with the forms of business a coop
bank can undertake:
Coop banks in addition to banking can undertake
following:
• Borrowing or raising money
• Lend money either on or without security
• 20 major activities like dealing in cheques and
instrument, granting of letter of credits,
providing safe deposit lockers, hold any
property for the purpose of security against
loans, acquisition, construction, maintenance of
any building for the purpose of the bank etc.
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• Further, GOI by notification, has specified hire
purchase, equipment leasing and insurance as
new forms of business, in which, it is lawful for
coop banks to be engaged.
• Further, the RBI can issue guidelines for the
conduct of above referred types of business
activities.
Sec 7 : Use of word bank, banker , banking or
banking company:
No Coop society other than a Coop bank shall use as
part of its name bank, banker or banking and no coop
society shall carry on the business of banking in India
unless it uses as part of its name at least one of such
words.
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What sort of activities it is prohibited to do from?............
Sec 8 – Prohibition of trading
Coop bank is prohibited from
• engaging directly or indirectly in any trading, buying,
• selling or bartering of goods (Goods means any
movable property, other than auctionable claims,
stock, shares, money, bullion etc referred to sec 6) for
others, except
• for realisation of security given or held by it or in
connection with the bills of exchange received for
collection or negotiation.
• Thus, basically a coop bank cannot undertake any
trading activity
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What about doing estate business/acquisition of
land and building?.....................
Sec 9 -Deals with disposal of non banking assets.

Except required for its own, a coop bank is

prohibited from holding immovable property,
howsoever acquired, for more than 7 years.
If not, it can seek extension of period from RBI
which may grant extension upto 5 years period
in the interest of depositors of the bank.

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What is the minimum share capital it has to
have?........
 Sec 11 - deals with minimum paid up capital

and reserves. As per this,

 No coop bank can commence or carry on the

business of banking in India, unless the

aggregate value of its paid up capital and
reserves is not less than Rs. One lakh.
If a Cooperative society wants to become a
Coop bank, it has to work as a cooperative
society atleast for a period of two years.
(Sec.s 12,12A, 13,15,16,17 shall be omitted)
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Sec 14 A – Prohibition on creating floating
charge on bank’s assets
No coop bank can create a floating charge on
any property of the bank, unless it is certified
by the RBI in writing, as not being
detrimental to the interest of depositors.

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Can a bank utilise entire deposits it receives in
loans and advances and other investments?.....
As a precaution all banks are to keep a portion of
deposits so received, in the form of CRR &
SLR.
What is meant by CRR ?......................
It is Cash Reserve Ratio and
as per Sec 18 of BR Act

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Every cooperative bank (not SCB) shall maintain in India
by way of
• cash reserve with itself, &
• net balances in current account with SBI & its
subsidiaries and Nationalised banks or
• by way of balance in a current account with the
RBI or
• the State Coop bank of the State concerned or
by way of net balances in current accounts with
its higher financing agency (SCB) -
• a sum equivalent to atleast 3% of the total
demand and time liabilities in India, as on the
last Friday of the second preceding fortnight
and shall submit to the RBI before 15th day of
every month a return in Form B showing the amount
so held
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The average cash balance maintained in such
account should not be less than 3% (can be
increased upto 20%) of the NDTL of the bank
as on the last Friday of the second preceding
fortnight.
 Explanation.--For the purposes of this section,--

(a) "average daily balance" shall mean the

average of the balances held at the close of
business on each day of the fortnight

(b) "fortnight" shall mean the period from
Saturday to the second following Friday, both
days inclusive
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- on alternate Fridays during a month with particulars of
its DTL.
• Notified bank under this section are SBI, its
subsidiaries and all Nationalised banks.
Similar to Sec 18 of BR Act - Sec 42(1) of RBI
Act
Scheduled coop banks are governed by Sec
42(1) of RBI Act for this purpose.
Every bank included in the Second Schedule
shall maintain with the RBI an average daily
balance the amount of which shall not be less
than three per cent of the total of the demand
and time liabilities in India
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 42 (6) (a) For the purpose of inclusion in
Second Schedule the bank –

(i) has a paid-up capital and reserves of an

aggregate value of not less than five lakhs of
rupees, and

(ii) satisfies the Bank that its affairs are not

being conducted in a manner detrimental to the
interest of its depositors, and

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 6. (b) direct the exclusion from that Schedule of
any scheduled bank,--

(i) the aggregate value of whose paid-up capital

and reserves becomes at any time less than
five lakhs of rupees, or

(ii) which is in the opinion of the Bank after

making an inspection under section 35 of the
1*[BR Act, 1949 conducting its affairs to the
detriment of the interest of its depositors, or
 (iii) which goes into liquidation or otherwise
ceases to carry on banking business:
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In addition to regular banking, banks can
purchase the shares of other cooperative
institutions as a member.
Then how many shares it can purchase?..........

Sec 19 – Restriction on holding the shares in

other coop societies -
Bank shall not hold shares in any other coop
society beyond the limit prescribed by the RBI.
Such total investments should not exceed 2% of
its own funds or 5% of the subscribed share
capital of such society.
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Can a coop bank lend against its own shares?....
Sec 20 – Restriction on loans against its own
shares and to Directors and their relatives.
20 (a) - A coop bank cannot grant loans and
advances against its own shares
20 (b) - A coop bank cannot sanction unsecured
advances to the Directors and to firms in which
the Director is interested acting as partner or
MD or guarantors or to individuals where the
Director is the guarantor.

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20A – Without the prior approval of RBI, a coop
bank cannot remit in whole or in part, any debt
due by its past or present director or a firm
where the Director is interested.
Advance portfolio of banks can be cotrolled by RBI
• Sec 21 – RBI’s power to control advances of
coop banks
• RBI has powers to determine the policy in
relation to advances to be followed by Coop
banks. It may be in general or - of a specific
bank or - a specific activity.
• This is as a part of Selective Credit Control
measure the RBI has.
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Under the powers conferred by this section 21,
the RBI may issue directives to coop bank for
the:
a) Purpose for which advances may or may not be
made
b) Margins to be maintained in respect of secured
advances
c) Maximum amount of advances or other
financial accommodation in relation to its paid
up capital and reserves , may be made by a
coop bank to any party
d) Rate of interest, guarantees to be issued for
such advances
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Every coop bank is required to comply with
whatever the directions issued by the RBI.

Banks may fix rate of interest, margin etc., but if

some body goes to court against this ?..........

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• Sec 21A – Rate of interest charged by bank not
to be subjected of scrutiny by courts.
• A transaction between a bank and its debtors
cannot be reopened by any court on the ground
that the rate of interest charged by the Coop
bank in respect of any such transaction is
excessive.
• However, courts can disallow excess interest
and give relief, if it is proved that the interest
charged and compounded is not in conformity
with the rate and periodicity prescribed by RBI,
if supported by reasons.
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How RBI grants licence?....... If somebody wants
to open bank – how to open?.

Sec 22 – Licensing of coop banks

No coop bank can carry on banking business
unless a license is issued by the RBI to the
effect.
However, in case of coop banks which were in
existence as on 1 March 1966, were required to
apply for a license to RBI within 3 months from
1 March 1966.
Such banks were permitted to carry on banking
business till their application for license is
rejected by RBI.
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For an existing bank, before granting the license, the
RBI by inspecting the books of accounts of the bank,
will have to satisfy itself on the following points:
a) The bank is in a position to pay claims of the present
and future depositors.
b) The affairs of the bank are not / not likely being
conducted in a manner detrimental to the interest of
depositors
c) General character of management of the bank will not
be prejudicial to the public and the depositors
d) The bank has adequate capital structure and earning
prospects
e) Public interest will be served by granting license.
09/11/08 32
f) The opening of the bank in that area will not
affect the banking system or monitory stability
and economic growth of the country.
g) Any other condition the RBI feels necessary

Similarly the bank can cancel the license already

issued, if any of the above conditions are
violated / not fulfilled.
The bank can appeal to the Central Govt against
the RBI’s decision to cancel the license.

09/11/08 33
Sec 22 deals with opening of bank then what
about branches…………..

Sec 23 – Deals with opening of branches by

banks
Under the Sec 23, no Scheduled Coop bank
(other than DCCB) can open its branches,
without the prior permission / approval of the
RBI.
Exception is opening of branch in shandies /
special functions for a short period of 1 month
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Sec 24 – Maintenance of Statutory Liquidity Ratio
(SLR)

Every bank shall maintain in form of cash, gold

or unencumbered approved securities an
amount, which shall not, at the close of
business be less than 25 % of its DTL as
specified by RBI from time to time.

Consequent upon amendment in the Act, w.e.f

January 23,
23, 2007
2007,, the minimum 25%
25% has been
removed and presently the SLR is 23
23%.
%. This
SLR shall not exceed 40% of DTL.

09/11/08 35

e.
The eligible SLR include :
•Excess cash maintained over and above the
required CRR under Sec18 / 42(1).
•Gold, valued at price, not exceeding market
price
•Unencumbered approved securities valued at
cost price, or market price or book value or face
value as specified by RBI from time to time
Approved securities means, the securities
approved under Sec 20 of Indian Trust Act
1882 and include Central and State Govt
securities and others as prescribed by RBI.
On failure to maintain such CRR or SLR, the RBI
is empowered to levy penalty on the bank and
every Director/Manager of the bank who was
responsible for such deficit.
The CRR and SLR, is to see that the banks have
liquidity to meet the demand for cash in case of
exigencies.

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• Sec 24 A – Exemption from CRR & SLR
• RBI by notification, may exempt a Coop bank or
a class of banks from the provisions of Sec 18
& 24. Such notification may specify the period,
branch, bank with or without any condition.

• Sec 26 – Unclaimed deposits

• Every coop bank has to keep a record of all the
accounts which are not operated or unclaimed
for 10 years and submit a return to RBI in form
VIII as at the end of the calendar year and
within one month.
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Sec 27 – Monthly and other Returns
Every coop bank has to submit to RBI a monthly
Return in prescribed form showing the assets
and liabilities of the bank as at the close of
business on last Friday of the month.
Under this provision, RBI may also prescribe any
other Return to be submitted on a periodical
basis.
Sec 28 – Power to publish information
RBI may in the public interest publish information
obtained by it under this act, in such a
consolidated form as it thinks fit.
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Sec 29 & 31 – P&L A/c and B/S
Every coop bank has to prepare its Profit and loss
account and the Balance sheet as at 31 March
in the proforma set out in Third schedule to BR
Act.
These banks have to submit to RBI three copies
of the P&L and B/s together with the Statutory
Auditor’s Report before 30 Sep every year.
In case of failure to submit, the RBI under Secs
46 & 47 A of BR Act, may penalise the bank for
non-submission.

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Sec 35 : Inspection
RBI at any time may cause an inspection by its
own officers or any officer authorised by it, of
any Coop Bank and its books of accounts. RBI
shall supply to the Coop Bank a copy of its
report on such inspection.
Sec 35 A – powers of RBI to give Directions
RBI can issue Directions to any coop bank in
general or any coop in specific on any aspect of
banking. The direction is issued in the interest
of the public / depositors
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Sec 36 – Further powers and functions
RBI can caution, may give loan or advance, may
depute, appoint officer to observe, for scrutiny
of returns, statements, information submitted by
any coop bank.
36 A – Exemption from the Act
Sec 11, 18 & 24 will not apply to the coop banks
whose license have been rejected under Sec
22 of the Act or who have been prohibited from
accepting deposits. They have to pay back the
deposit.

09/11/08 42
Sec 36 AD – punishment for certain activities
Any person who obstructs any person entering,
leaving a bank, carrying on banking business,
prevent normal business shall be punishable with
imprisonment and or fine.
Sec 45 – Power to RBI to apply to Central Govt for
suspension of banking business
RBI with a good reason to do so, may apply to
Central Govt. to issue an order of moratorium in
respect of a coop bank.
The coop bank will not make any payment to any
depositor or discharge any liability or obligation of
any creditor, except otherwise provide in the order
issued by Central Govt.
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45 – Y, Power of Central Govt to make Rules for
preservation of Records.
CG has power to make Rules, in consultation with RBI
specifying the period which Coop bank shall
• Preserve its books of account and other documents &
• Keep with itself different instruments paid by it
Accordingly Coop banks (Period of preservation of
Records) Rules 1985, have been made effective by
CG and as per this
• Coop banks shall preserve, their books, accounts and
other documents like registers of cheque book,
liability, remittances received or dispatched, vault, TT
transfer in good order for a period of 5 yrs.
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• Records of loan, deposit, stock, investments,
safe custody, cash, transfers, paid cheques,
pay--in
pay in--slips, vouchers etc, to be retained for 8
years.
• RBI has powers to advise any Coop bank to
maintain any record for longer periods also.
45 – Z Return of paid instruments to customers.
With a request made by the customer, the Coop
bank can return the paid instrument before the
prescribed period after taking a true copy of the
instrument giving the accuracy of the
instrument.
. 09/11/08 45
• 45 - ZA and ZB - Nomination for payment of
depositor’s money and protection against third
party
• It is a facility provided to the depositor where,
in case of death of the depositor the amount
may be returned by the bank.
• The bank is fully discharged of its liability in
respect of such deposit by payment in
accordance with this section.
• However, if there is court order, then only the
bank may stop payment to the nominee.
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45 - ZC and ZD : Nomination for Articles kept in
Safe Custody and protection against third party
notice
Similar to the nomination of deposits, a depositor
can nominate a person for receiving the articles
kept in the Safe Custody and the nominee has
right to receive the articles in case of death of
the depositor.
The bank is not bound by any third party notice in
respect of articles kept in Safe custody.

09/11/08 47
45 – ZE and ZF : Nomination in respect of Safety
Locker
Sole hirer can nominate only one person in form
SL 1, Coop bank can give access to that person
either to operate or remove the articles.
When locker is hired and operated by two or
more, they can jointly nominate a person /
persons in form SL 1A, to give access with
surviving hirer to operate or remove the articles.
The bank is protected from any legal proceedings
for any damage for allowing access as per
these provisions
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Sec 46 – Punitive power of RBI
I. Any person knowingly giving false information /
document to the RBI can be imprisoned upto 3
years
II. Any person failing to produce any book of
accounts or answer / any information to the
Inspecting officer under Sec 35 with a fine upto
Rs.2500 for each offence and Rs.100 per day
during continuance of such offence
III.Any person knowingly has allowed the bank to
accept deposit when prohibited will be fined
upto Rs.50,000 or twice the amount involved.
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I. Any person responsible for contravention or
default in complying with any provision, order,
rule, direction or condition imposed under the
Act with a fine upto 50,000 or twice the amount
involved, which ever is more and Rs.2500 per
day of continuation of contravention or default

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47 A – Penalty imposition
• Under this provision, the RBI can impose
penalties for the default as per III and IV of 46,
without recourse to any court of law.
• For the purpose of adjudging penalty, RBI will
serve a show-cause notice on the bank and
give it reasonable opportunity of being heard.
Conducting enquiry is laid down in Rule II of BR
Coop Rules 1966.

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Sec 49 – Restriction on acceptance of deposits
withdrawable by cheque
No person other than a Coop bank, RBI, SBI or
any other banking institution, shall accept
deposits from public,
Sec 35 A – powers of RBI to give Directions
RBI can issue Directions to any coop bank in
general or any coop in specific on any aspect of
banking. The direction is issued in the interest
of the public / depositors,

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 Form I – Statement of Demand and Time
liabilities in India and amount maintained in
India in Cash, gold and unencumbered
approved securities for the month of ……………
to be submitted within 15 days from the close of
the month
 Form II – Return showing the unsecured
advances sanctioned by the bank to its
Directors or their relatives, to the companies in
which the Director is acting as the Director of
Managing director or interested in it as on the
last day of the month – to be submitted within
one month
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Statutory Returns to be submitted by banks under the
BR Act 1949 AACS
Return Periodi-city As on Section of BR About
in Form Act 1949(AACS)

I Monthly last Friday of 18 & 24 DTL, CRR & SLR

month {42(1) of RBI
Act}
II Monthly - do - 20 Unsecured advances
to Directors
VI Quarterly Last day of 23 Branches
quarter opened/closed
VIII Annual 31 Dec 26 Unclaimed deposits
for more than 10
years
IX Monthly Last Friday of 27 Balance sheet of
month the bank

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• These powers have been conferred to RBI to
control / direct the banks to function in a proper
way so that entire banking system in the
country is safe, strong and self dependent.

• Till now we have discussed about various

important provisions of BR Act 1949(AACS) like,
5, 6, 8, 9, 11, 14 A, 18, 19, 20, 21, 22, 23, 24,
26, 27, 28, 29, 31, 35, 45, 46 etc.

• Let us look back what those provisions/sections

deal with?...........
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 Form VI – Statement showing the details of
branches opened and closed during the quarter – as
on the last day of the quarter – to be submitted
within one month
 Form VIII – Return showing the details of the
unclaimed deposits held by the bank for more than
10 years to be submitted as on 31 December of
every year – within one month from the close of the
year
 Form IX – Return showing the details of assets and
liabilities of the bank as on the last Friday of month
to be submitted within one month from the date of
the Return
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 OSS returns – OSC 1 to 4
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