Banking Regulation Act 1949

Banking Legislations
& Reforms -1
Banking Regulation Act, 1949
• Sec 6: Prohibits banking companies from

trading & speculative activities.
Failure of Indian Specie Bank in 1914 – Lost `111 lacs in silver

speculation, ` 36 lacs in advances against pearls
• Sec 7 amended in 1963: Prohibits the use of

‘bank’, ‘banking company’, ‘banking’ to a
firm, company, individual other than banking
company
• Sec 11 amended in 1962:

 Minimum paid up capital is ` 5 lacs which was earlier `
50,000.
 Minimum paid up capital is ` 10 lacs if the bank has offices
in Mumbai or Kolkatta.
 As per guidelines issued by RBI in Jan.1993, Minimum paid
up capital is ` 100 cr for a new private sector bank. The
same has now been increased to ` 200 cr.
 Minimum paid up capital is ` 5 cr for a local area bank
• Sec 17 amended in 1962 further amended in

2001: Transfer 25% of net profit (before
appropriations) after adjustment /provision
towards bonus of staff to reserve fund
To act as a brake on the policy of declaring large dividends to

satisfy the shareholders thus undermining sound banking
principles.
• Sec 12 (1): The subscribed capital must not

be less than ½ of the authorised capital and
the paid up capital must not be less than ½
of the subscribed capital
To avoid the unscrupulous banks to mislead the ignorant

public.
• Sec 12: Maximum voting rights of a

shareholder on poll in respect of any shares
held by him are limited to 1% of total rights of
all the shareholders of the banking company.
This has now been increased to 10%.
• Sec 16: No banking company incorporated in

India shall have as director any person who
is director of another banking company
• Sec 20: Prohibit to make any advances on
security of its own shares, give loans to any
director , firms or private concerns in which
the bank or any of the director is partner or
managing agent.
People’s Bank in loan when closed its operations had ` 86 lacs

out of total depoists of ` 1 cr as advances in which MD was
personally interested
• Sec 24: SLR 25% of the total demand & time
liabilities
In Gold, cash, tangible securities valued at market price

Banking Regulation Act – Powers of RBI
• Sec 21: Empowers RBI to direct
1. Where advances may be made or not
2. What margins to be maintained
3. What rate of interest to be charged
4. What maximum amount of advances or
guarantees to be given on behalf of a
company, individual or association of
persons
• Sec 22: Every bank requires to obtain
licence from RBI, also authorised to cancel
the licence
Mainly to check mushrooming of unsound banks. RBI inspects

the institution affairs and satisfies that it is in a position to
repay the depositors
• Regulate the appointment and remuneration
of senior officers in banks
• RBI is empowered to inspect any banking
company at any time, call for a meeting of
directors and change the management if
desirable
• RBI is empowered to apply to High Court for
the winding up of any banking company
• RBI is required to make annual report for
Central Government on the trend & progress
of banking in the country, including its
suggestions, if any, for strengthening of the
banking business.
• The bank has to disclose all the undisclosed
reserves that the bank has to RBI.
Undisclosed reserves are not published by the
bank in the annual reports.
Banking Companies (Second Amendment)
Act,1960
• For any reconstruction /rehabilitation of a
bank in difficulty, the RBI can sanction a
scheme and temporary moratorium be
arranged from Central Government.
All the creditors and depositors are paid from the moratorium
received by the Bank.
Banking Companies (Amendment) Act,1961
• RBI has powers to formulate and carry out
with the sanction of the Government,
scheme of reconstruction & compulsory
amalgamation of sub-standard banks with a
well managed institution
Employees, assets as well liabilities shall be absorbed by the

transferee bank
I. To strengthen banking system

II. To enable scheduled banks to provide
larger credit to exporters for a longer period
1. Statutory Cash Balances: Sec 42 of RBI

Act, 3% -15% of demand and time liabilities
should be maintained with RBI
2. Liquidity ratio: Earlier 20%, now increased
to 25%.
3. Capital Funds: 25% of net profit before appr
transferred to reserves after providing for
employee bonus.
4. Credit Information: RBI collects credit
information from banks.
5. Export Finance: BOP accepted by RBI,

maturity period increased from 90 to 180
days. RBI provides special
accommodations to banks if it is for the
purpose of financing exports.
Banking Law (Miscellaneous Provisions) Act,
1963
Prohibit the issue of any prospectus or

advertisement by any non-banking
institution soliciting any deposits from the
public or any advertising on receipts of such
deposits.
The amount collected, rate of interest and
payback period need to be conveyed to RBI
Annual Balance Sheet & P&L should be send
to every deposit holder.
Banking Law (Application to Cooperative
Societies) Act, 1966
Came into force on 1st March applicable to

• State Cooperative Banks
• Central Cooperative Banks
• Urban cooperative banks (non-agricultural
credit societies)
They are eligible to borrow from RBI in emergency, 3% CRR,

25% SLR, prohibited unsecured loans to directors, fall
under various selective credit controls, need licence to
start a branch to help proper coordinate between
commercial and cooperative banks
Deposit Insurance Cooperation Act, 1962
Main Objective: Give a measure of protection

to depositors, assurance of safety that helps
in active development of banking , reduce
panicky withdrawals.
Authorised capital:` 1 cr. Fully paid up by RBI,

can borrow max. ` 5 cr from RBI.
Deposit Insurance Corporation Act, 1962
Maintain separate Deposit Insurance Fund:
All premiums received by Corporation

All amounts received from liquidators
Amounts transferred to the Fund from general
Reserves
Advances from RBI
All incomes from investments made out of the
Fund
Deposit Insurance Fund is used to:
Make payments in respect of insured deposits

Meet liabilities in respect of advance taken
from RBI
Meet liabilities in respect of amount transferred
to the Fund from general reserve
The Corporation is required to invest only in

Central Government sercurities and treat
RBI as its sole banker
Management of the Corporation consists of:
1. Governor of RBI
2. Deputy Governor of RBI
3. An officer of the Central Government
4. 2 directors nominated by CG with
consultation with RBI having special
knowledge of commercial banking, tenure
4years
Liability of the Corporation in respect of
Insured Depositors
1. Pay every depositor not more than

`1,00,000, earlier amount being ` 1500, in
case of liquidation, winding up,
reconstruction or amalgamation in 5 months
from the date of winding up and before
expiry of 2 months on receipt of such list
from the liquidator.
2. The Corporation is entitled to reimburse
itself for such payment from the assets of
the insured bank
Deposit Insurance Corporation
Deposit Insurance Corporation has been

renamed as Deposit Insurance and Credit
Guarantee Corporation (DICGC)
Differential Interest rates (DIR)
Selected low income group who deserve

financial assistance for productive
endeavour but cannot easily negotiate with
the banks, RBI appointed Dr. Hazari to
examine the question of DIR.
Implementations
1. Lend min. 1% of bank loans

2. Assist 7 lacs to 15 lacs people
3. Grant 2/3rd the total loan to rural and semi
urban areas.
4. Give 1/3rd of the total loans to scheduled
castes and tribes
5. Charge interest rate 4%.
6. Loans only to people not eligible for
subsidy-linked schemes
Implementations
7. Annual family income Rs.6400 in rural areas

and Rs.7200 in urban and semi urban
areas.
Important Provisions Concerning Conduct of Banking Business in India
• Disposal of immovable property (Sec.9)

• Management (Sec.10)
• Commission on sale of shares (Sec.13)
• Return of unclaimed deposits (Sec.26)

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Banking Legislations

• Sec 6: Prohibits banking companies from

Failure of Indian Specie Bank in 1914 – Lost `111 lacs in silver

• Sec 7 amended in 1963: Prohibits the use of

• Sec 11 amended in 1962:

• Sec 17 amended in 1962 further amended in

To act as a brake on the policy of declaring large dividends to

• Sec 12 (1): The subscribed capital must not

To avoid the unscrupulous banks to mislead the ignorant

• Sec 12: Maximum voting rights of a

• Sec 16: No banking company incorporated in

People’s Bank in loan when closed its operations had ` 86 lacs

In Gold, cash, tangible securities valued at market price

Mainly to check mushrooming of unsound banks. RBI inspects

Employees, assets as well liabilities shall be absorbed by the

I. To strengthen banking system

1. Statutory Cash Balances: Sec 42 of RBI

5. Export Finance: BOP accepted by RBI,

Prohibit the issue of any prospectus or

Came into force on 1st March applicable to

They are eligible to borrow from RBI in emergency, 3% CRR,

Main Objective: Give a measure of protection

Authorised capital:` 1 cr. Fully paid up by RBI,

Maintain separate Deposit Insurance Fund:

All premiums received by Corporation

Deposit Insurance Fund is used to:

Make payments in respect of insured deposits

The Corporation is required to invest only in

Management of the Corporation consists of:

1. Pay every depositor not more than

Deposit Insurance Corporation has been

Selected low income group who deserve

1. Lend min. 1% of bank loans

7. Annual family income Rs.6400 in rural areas

• Disposal of immovable property (Sec.9)

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