Banking Regulation Act 1949:

Learning Objective:

 List the important provisions of Banking Regulation Act 1949 applicable to

banking companies and cooperative banks tifyI

 Outline the Acts/provisions vesting powers with RBI over the management of
Banking Companies
Introduction:

 Banking in India is controlled/monitored and governed by Govt. of India through Banking

Regulations(BR) Act,1949 and RBI through RBI Act,1934
 BR Act 1949 was enacted to consolidate and amend the law relating to banking and provide for suitable
framework for regulating Banking Companies.
 The Act was initially passed as Banking Companies Act 1949 (wef 16-3-49).
 It was changed to Banking Regulation Act 1949 (wef 1-3-56), applicable all over India.
 Banking Companies Act 1949 became applicable to Jammu & Kashmir in 1956 only.
 Thus Companies Act, 1956 is applicable except where special provisions are made in BR Act.
 The provisions of the BR Act are applicable to banking companies and cooperative banks, with certain
modifications, in addition to other laws which are applicable to such companies, unless otherwise
specially provided in the Act.

BR Act is not applicable to:

 PACS (Primary Agricultural Credit Societies)
 Co-Operative Land Mortgage Banks/Land development banks
 Non-agricultural Primary Credit Societies

The controls for different banks vary based on whether the bank/s is/are

 Statutory Corporation
 A Banking Company
 A Cooperative Society
In short the BR act deals with:

 Regulating business of banking companies

 Control over the management of banking companies
 Suspension & winding up of banking companies
 Penalties for violation of provisions of Act

Important sections of Banking under BR Act 1949

Definition of Banking:

 Sec 5(b) of the Act defines “Banking” as ‘acceptance of deposits of money from public for the purpose
of lending and investment, and These Deposits are repayable on demand or otherwise and withdraw
able by cheque, order or otherwise’.
 Sec 5(n) Secured Advances: Advances where the market value of security at any time is not less than
the advance outstanding.
 Sec 5(a) Approved Securities: Securities in which a trustee may invest money under Sec 20 of Indian
Trust Act, 1882
 Sec 6(1) (a) to (o) Authorized Business of a banking company- deals with the definition of banking
business – accepting deposits, borrowing money, lending money, dealing in bills, collection of bills,
buying and selling foreign exchange, lockers, issuing letters of credit, TC, mortgage, insurance, acting as
trustee etc. or any business which Central govt. may notify in Official Gazette.
• A banking company is not permitted to engage in any form of business other than those mentioned
in the Act.
 Sec 7 of BR Act: specifies that banking companies doing banking business in India should use the word
“Bank”/ “ Banking”/ “Banking company” in its name, i.e.
• No company other than a banking company can use the word ‘bank’, ‘banker’, ‘banking’ as part of
their name.
• Subsidiaries of banks and association of banks in certain cases are exempted from this restriction.
 Sec 8 of BR Act prohibits a banking company from engaging directly or indirectly in trading activities,
buying or selling or bartering of goods.
• But a bank can realize the securities given to it or held by it for a loan, for realization of amount lent.
 Sec 9 of BR Act prohibits a banking company from holding immovable property, howsoever acquired,
except as is required for its own use, for a period exceeding 7 years from acquisition. RBI may have
extended the above period by 5 years.
 Management of a bank vests with its Board of Directors
• Board to be constituted as per Sec 10 of BR Act.
• One of the directors has to be appointed as Chairman of the board. Whole time director is entrusted
with the management of the bank.
• Management of the bank is entrusted with MD, if the chairman is a part-time director.
• Directors of a bank are of two categories - Whole time (CMD, MD & ED) & Part time directors
 Sec 10.1(c) (iii) of BR Act - Whole time directors can hold office for a max period of 5 Years at any one
time, the term can be renewed for further periods not exceeding 5 years on each occasion. [10A(2A)]
• Part time directors cannot hold office for consecutive periods exceeding 8 years.
• Whole time directors cannot be director of any other company, except subsidiary or Company
registered under Sec 25 of Companies act.
• Whole time directors are not entitled to any commission or share or in profits of a banking
company.
 • Insolvents, convicted by criminal course of offence involving moral turpitude cannot be appointed
whole time directors.
 Sec 10A (2) of BR act - Not less than 51% of total number of directors should have knowledge/ or
other experience of accountancy, agriculture, rural economy, banking, cooperation, economics, law,
finance, small-scale-industry etc.
• Of these 51%, at least two should have special knowledge or practical experience of agriculture &
rural economy / cooperation / SSI.
 Sec 11 of BR Act – stipulates the Minimum Paid-up Capital & Reserves and their terms and conditions,
• for (a) Foreign Banks, (b) domestic banks,
• ₹ 5.00 lac for bank incorporated in India and having place of business in more than one state, ₹
10.00 lacs if such place includes Mumbai, Kolkata or both.
• (Under section 22 RBI can stipulate a higher requirement, for licensing of a banking company).
• In 2005, RBI stipulated the minimum capital requirement for new private sector bank at ₹ 300
Crores as a part of corporate governance guidelines and as a policy of Foreign Direct Investment
• The initial minimum paid-up capital for a new bank shall be Rs.200 crore. (The initial capital will be
raised to Rs.300 crore within three years of commencement of business.)
• RBI has proposed a minimum paid up capital requirement of both payments banks and small banks
at Rs. 100 crore
 Sec 12 of BR Act stipulates:
• Ratio of Authorised: Subscribed: Paid-up capital -
(subscribed capital shall not be less than half of the authorized capital; and the paid up
capital shall not be less than half of its subscribed capital)
• Voting Rights of shareholder:
Though there is no ceiling on a person’s holding of shares in a banking company, section
12(2) restricts voting right of shareholders to 10% or less of the total voting rights of all the
share holders

A Banking Company is prohibited from:

 Sec 13: Paying brokerage / commission exceeding 2.5% of the paid up value of shares issued by it
 Sec 14: Creating a charge on its unpaid capital & creating a floating charge over its assets without prior
permission of RBI (14A)
 Sect 15: No dividend is payable until all capitalised expenses are completely written off, and minimum
9% of CAR and net NPA not exceeding 7% is maintained.
 Sec 17: A banking company is required to transfer not less than 20% of the profit made during the
year to reserve fund, before any dividend is declared.
 Sec 18: A Non-Scheduled bank is required to maintain Cash Reserve:
o at least 3% of its total demand & time liabilities in India
o as on the last Friday of the second preceding fortnight,
o in the form of balance with itself or with RBI or with other scheduled banks.
 Sec 19(2): Shareholding by banks whether as pledgee, mortgagee or absolute owner in other
companies cannot exceed 30% of paid-up share capital of that company or 30% of its own paid-up
share capital & reserves whichever is less.
 Sec 20: No banking company shall grant any loan or advance on the security of its own shares
 Sec 21: Control by RBI over advances in banks – in Selective credit control and power to issue directives
to banks to determine policy for advances (such as -Purpose of advance, Margin to be maintained,
Maximum amount of advance & Rate of interest etc.)
 Sec 21A: Exemption from scrutiny by courts, in respect of Rate of Interest charged by banks on the
ground of being excessive.
 Sec 22: Requirement of license from RBI for commencing or carrying on the business of banking in India.
 • No license required for temporary place of business (exhibition, mela, conference etc) up to one
month,
• The refusal of license by RBI to a company would make it ineligible to undertake banking business,
but it would still be open to the company to carry on other business like money lending.

• The following conditions are to be satisfied by the applicant, before RBI grants license-
o The company should be in a position to pay its present and future depositors I full as their claims
accrue,
o The affairs of the applicant company conducted or likely to be conducted should not be in a manner
detrimental to the interest of its present and future depositors,
o The general character of the proposed management of the company will not be prejudicial to public
interest or the interest of the depositors,
o The company has as adequate capital structure and earning prospects,
o By grant of license to the company, public interest will be served,
o Granting of license should not be prejudicial to the operations and consolidation of the banking
system already in existence in the area, and be consistent with the monetary stability and economic
growth,
• Before RBI grants license, in the case of a foreign company, the following three conditions are to be
satisfied by the applicant, in addition to the above conditions -
• The banking business conducted by the company in India will be in public interest,
• The government or the law of the country outside India, in which the applicant company is
incorporated, should not in any way discriminate banking companies registered in India,
• All provisions of the BR Act as applicable to foreign companies, should be complied with by the
applicant company.
 Sec 23: Branch licensing ∷ Banks need to obtain License from RBI for opening a new place of business
or changing existing location. As per this section.
• “Place of business” includes sub-office, pay office, or any place at which deposits re received,
cheques cashed or money lent.
• Changing existing place of business within same city, town etc do not require such permission.
 Sec 24: specifies the requirement of every bank to maintain a percentage (known as SLR -Statutory
Liquidity Ratio, as advised by Reserve Bank of India from time to time) of the bank’s demand and time
liabilities.
• It should be in the form of cash, gold, unencumbered securities.
• It can be varied by RBI from 25% up to maximum 40%, as on last Friday of 2nd preceding fortnight.
 Sec 26: Returns on unclaimed deposits to be submitted for accounts not operated for 10 years & above
within 30 days after the close of each calendar year.
 Sec 27: Every bank has to submit a return on Assets & Liabilities as on last Friday of each quarter to RBI
latest by end of next month.
 Sec 29 to 33: Balance sheet & Profit & Loss A/C to be prepared in the format A & B given in third schedule
of the Act. It is to be signed by CMD & at least 3 Directors.
 3 copies of the Balance sheet duly audited must be furnished to RBI within 3 months from the date of
Balance Sheet (Sec 31)
 Sec 35: gives powers to RBI for Inspection of banking companies on issues related to
o Banking Ombudsman, KYC, Clean Note policy and ROI on SB and Time deposits
 Sec 36:
• Power of RBI to remove top management where it considers desirable to do so and
• Power to prohibit a banking company to enter into any particular transaction or a class of
transaction in the following circumstances-
 o Public interest and Preventing the affairs of the banking company being conducted in a manner
detrimental to interest of depositors
o Securing proper management of the banking company
 Sec 36 also empowers Central Govt. to acquire any banking company with consultation of RBI.
 Sec 38 also empowers Central Govt. to acquire any banking company with consultation of RBI, under
following circumstances-
o The banking company is unable to pay its debts
o An application for winding up has been made by the RBI under section 37 or section 38 of the BR
Act.
 Sec 45: RBI has power to apply to Central Govt. for suspension of business by a banking company and
prepare a scheme for reconstitution or amalgamation.
 Sec 45Y: Preservation of records. The Central Govt. may after consultation with RBI and by notification,
make rules specifying the periods for which a bank shall preserve various records.
 Sec 45Z: Return of paid cheques to customers after keeping true copies of them. In CTS environment,
only images (Paper to image) handed over to the Govt. departments
 Sec 45 ZA & ZB: Nomination in Deposit a/c
 Sec 45 ZC & ZD Nomination - Safe custody
 Sec 45 ZE & ZF: Nomination for Lockers
 Sec 47-A: RBI can impose penalty for various violations.
 Sec 49: No person other than a Banking Company / RBI / SBI / any other banking institution, firm or other
person notified by the Central Government, shall accept from the public deposits of money withdraw
able by cheque (This section will not apply to savings bank scheme run by Government)
 Sec 52: Power of Central Govt. to make rules.

Regulation by other authorities -Umbrella Acts:

Banking Operations in India may be impacted by any or more of the following Acts/ legal frame work or
regulatory control of some agencies, in addition to the RBI Act1934 and the BR Act 1949.

 Companies Act,1956
 The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980
 Partnership Act 1932
 Negotiable Instruments Act,1881
 Indian Contract Act,1872
 Stamp Act 1899
 Transfer of Property Act 1882
 Limitation Act 1963
 Sale of goods Act 1930
 Indian Trust Act 1882
 DRT Act,1993
 SARFEASI Act 2002
 Prevention of Money Laundering Act 2002
 Foreign Exchange Management Act, 1999, for forex trade etc.
 Securities Exchange Board of India under Securities Contract (Regulation) Act 1956 & SEBI Act 1992, for
dealings in securities
 IRDA in case of insurance business
 The Bankers' Books Evidence Act
 The Banking Secrecy Act
 Indian Coinage Act, 1906: Governs currency and coins
 Payment and Settlement Systems Act, 2007: Provides for regulation and supervision of payment
systems in India
 Labour Authorities & related rules and regulations
 Income Tax /Service Tax Authorities& related rules and regulations

Banks set up in India under various Acts/legal framework are:

Bank’s Category Legal Frame Work

State Bank of India State Bank of India Act,1955
Nationalized Banks - 1969 Banking Companies (Acquisition and Transfer of Undertakings) Act,1970
Nationalized Banks - 1980 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
Regional Rural Banks Regional Rural Banks Act,1976
Private Sector Banks Indian Companies Act,1986
Co-operative Banks Co-operative Societies Acts (State/Central) and Banking Laws (Applicable to
Cooperative Societies) Act,1965
Development Banks State Financial Act, 1951 NABARD, NHB, SIDBI ,Exim Bank