This article has been written by Mehernaz Contractor of Siddharth Law College, Mumbai. This article provides a detailed overview of the Banking Regulation Act, 1949 along with its amendments. It deals with regulations and rules which govern banks.
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Different types of banks, such as commercial banks, cooperative banks, rural banks, and private sector banks exist in India. The Reserve Bank of India (RBI) is the governing body for regulating and supervising the banks. Banking Regulation Act, 1949 is an Act that provides a framework for regulating the banks of India. The Act came into force on 16th March 1949. This Act gives RBI the power to control the behaviour of banks. This Act was passed as Banking Companies Act, 1949. It did not apply to Jammu and Kashmir until 1956. This Act monitors the day-to-day operations of the bank. Under this Act, the RBI can licence banks, put regulation over shareholding and voting rights of shareholders, look over the appointment of the boards and management, and lay down the instructions for audits. RBI also plays a role in mergers and liquidation.
The concept of banking started in India with the establishment of the Bank of Hindustan. Before nationalisation took place in India, the banking system of India was more of a private nature. Banks were struggling to keep their branches open. Low capital and reserves and greed for obtaining high profits became a reason for the failure of the banking system. The banks were supervised under the Companies Act, 1913, but this Act was not sufficient to regulate banks. The economy was not performing well, and this started to damage the banks. Also, the concept of banks was mostly used by the upper-class people. Frauds were also one of the reasons for the decline in the usage of banks. This gave a need to regulate the banking system of India. As a result, the Banking Regulation Act was introduced in 1949. It was initially applicable to banking companies, but after the Amendment in 1965, the Act was also applicable to cooperative banks.
The objectives of the Banking Regulation Act are stated below:
The sections under this Act are to be interpreted along with the sections of the Companies Act, 1956, or any other laws prevalent in the banking system. This Act applies to banking companies and cooperative banks. It will not apply to a primary agricultural credit society or a cooperative land mortgage bank, or any other co-operative society, except mentioned in Part V of the Act.
The Act has been divided into five parts comprising 56 sections.
The main features of the Act are mentioned below:
Some important provisions of the Act are stated below:
The Act has defined some terms such as banking, banking company, branch office, etc. A banking company means a company that conducts banking business in India. Banking means to accept for lending or investment of deposits of money from the public which can be repaid on demand. Subsidiary banks have the same meaning as given under the State Bank of India (Subsidiary Banks) Act, 1959. A secured loan or advance means an advance or a loan secured against the security of assets.
Under Section 6(1), a banking company may be involved in the business of borrowing or lending money; buying or selling bills of exchange, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures; buying or selling of foreign exchange; dealing stock, funds, shares, debentures, bonds; carrying on agency business such as clearing and forwarding of goods; conducting the business of guarantee and indemnity, etc.
Trading is prohibited under Section 8 of this Act.
No banking company shall directly or indirectly deal in the buying or selling, or bartering of goods except when it is selling the goods kept in its security. The bank should also not engage in any trade or buy, sell or barter goods except for bills of exchange received due to collection or negotiation.
The bank should not employ or be employed by the managing partner as stated under Section 10 of the Act.
The bank should also not employ a person who has been adjudicated insolvent or whose remunerations depend on the profits of the company. At least 51% of the total members of the board must have professional experience in matters such as accountancy, agriculture, rural economy, banking, cooperation, economics, finance, law, small-scale industry, etc. The term of the office of the director should not be more than eight years.
Section 11 states that if a banking company is incorporated outside India then the total value of its paid-up capital should be more than fifteen lakhs and if it has a place of business in Calcutta or Bombay or both, then it should be more than twenty lakhs.
The banking company must deposit twenty percent of its profit for the year. If the company is incorporated in India and if it has branches in different states, then the paid-up capital is five lakhs of rupees, and if the place of business is situated in the city of Bombay or Calcutta or both, then ten lakhs of rupees must be the minimum paid-up capital. If the company has all its branches in the same state none of which is situated in the city of Bombay or Calcutta, then the paid-up capital must be one lakh rupees concerning its principal place of business, plus ten thousand rupees in respect of each of its other branches situated in the same district in which it has its principal place of business, plus twenty-five thousand rupees in respect of each branch situated elsewhere in the state otherwise than in the same district.
The subscribed capital of the company should not be less than one-half of the authorised capital, and the paid-up capital should not be less than one-half of the subscribed capital. The banking company cannot create any charge on unpaid capital. The company shall transfer every year at least twenty percent of its profits to the Reserve Fund. The banking company must inform RBI of the appropriation of the Reserve Fund within twenty-one days from the date of appropriation.
A banking company should not form a subsidiary company unless the formed company is for an undertaking of a business or written permission was obtained from the Reserve Bank of India. The banking company can hold shares of an amount of more than thirty percent of the paid-up share capital of the company or its own paid-up capital.
No banking company can carry out business in India unless it has obtained a license from the RBI. RBI can hold the inspection of books before granting the license. RBI can also cancel the license if the company stops carrying on banking business in India.
Every banking company must obtain the permission of RBI before opening a new branch or transferring the existing branch to a different city, town, or state. No banking company incorporated in India shall open a new branch outside India without the prior permission of RBI. However, a new branch can be opened for a temporary period not exceeding one month.
The banking companies shall prepare a balance sheet and profit and loss account on the last working day.
RBI can cause the inspection of the banking company and must state its report to the company. The directors of the banking company must submit all books, accounts, or documents for inspection.
RBI may frequently issue directions to the banking company if it is satisfied that the directions are in the interest of the public or to prevent the banking company from detrimentally conducting business.
The banking company cannot obstruct any person from entering its place of business. It cannot hold anything violent in the place of business. The banking is liable under Section 36AD for violation of the above-mentioned activities.
Section 36 mentions the powers of RBI. The Reserve Bank may prohibit banking companies from entering into a particular transaction and can advise the banking company. It can also assist the banking company by granting loans or advances under Section 18. It can direct the banking company to call for a meeting of its directors to discuss the matters of the company. It can also appoint officers to observe how the affairs of the banking company are conducted.
If the banking company for a temporary period is unable to meet its obligation, it can apply for a moratorium to the High court. The High court can grant the moratorium and stop the proceedings for a temporary period as it deems proper. The period of the moratorium shall not exceed six months. The banking company is only considered valid if it has attached the report of the RBI stating that the banking company will be able to pay its debts if the application is granted.
The undertaking of banking companies must be done by the Central Government after consulting with the Reserve Bank of India. The undertaking must be done only after the banking companies have been provided with an opportunity for showing cause for carr
The banking companies should only pay dividends after all the capital expenses are paid up. It shall not pay the dividends until the depreciation in the value of investments in approved securities or investments in shares, debentures, or bonds are written off.
Every banking company must form a reserve fund and must transfer at least twenty percent of its profit to the reserve fund. Each banking company must report to the Reserve Bank if it has appropriated any funds from the reserve fund.
The Central Government may order the RBI to initiate insolvency proceedings if the banking companies have committed a default under the Insolvency and Bankruptcy Code, 2016.
Various provisions are mentioned in the Act which states that a person will be liable for imprisonment and fine if he does any act which is in contravention with the Act. It is stated under Section 46 as below:
The Banking Regulation Act has less scope on public sector banks. The amendments in the Act are not enough to leverage the stressed assets in the financial system. There are no strict provisions for non-performing assets (NPA), and this gives a chance to the defaulters to escape from the situation. Some provisions of this act can hamper the working of the banks.
Initially, the Banking Regulation Act was passed as Banking Companies Act, 1949. But with the introduction of the Banking Laws (Application To Co-operative Societies) Act, the word Companies was omitted and the word Regulation was added to the title of the Banking Regulation Act, 1949. The Act also added a new Section called Section 56 as Part V after Part IV in the Banking Regulation Act. This section will apply to co-operative societies subjected to some modifications.
This Act came into force on September 29, 2020. The Banking Regulation Act will not be applied to a cooperative society whose main business is providing long-term financial support for agricultural development. The amendment also mentioned that the societies should not use the words ‘bank’, ‘banker’, or ‘banking’ in their name or connection with their business. A cooperative bank may issue equity shares, preference shares, or special shares on face value or at a premium to its members or to any other person residing within its area of operation after obtaining prior approval from the Reserve Bank of India.
After the amendment, RBI may suspend the Board of Directors of a multi-cooperative bank for five years to protect the depositors. This amendment omitted some provisions like granting of unsecured loans or advances to its directors, and to private companies where the bank’s directors or chairman is an interested party, opening a new place of business, or changing the location of the cooperative bank outside of the city, town or village in which it is currently located without permission from RBI, etc.
All the banking companies will be controlled under the Banking Regulation Act, 1949. This Act provides a proper structure to the banking system in India. The Act puts restrictions on the banks to avoid fraud and protect the interests of the depositors. It also states the procedure for winding up the banking company. The Act also states the acquisition and mergers of the banking companies. Thus, this Act led to the proper growth of the banking companies which was lacking before 1949.
RBI performs the roles of the supervisor, regulator, and controller. RBI issues licences to banks, conducts inspections of the banking companies, lays down instructions for audits, controls mergers and liquidation, and regulates the operation of banks.
Approved securities means securities in which a trustee may invest money. It also means securities issued by the Central Government or any State Government or such other securities.
The Banking Regulation Act has given the Reserve Bank of India the power to lay down instructions to the banks in India for audits. RBI, under Section 30 of the Act, can direct to perform a special audit of the company’s accounts if it is for the greater good of the public.
Foreign banks can grant loans or advances to companies in India under Section 20 of the Banking Regulation Act. They can grant loans to companies if the director of the foreign bank has some vested interest in the company, if the company is a subsidiary of the company in which the director is interested.
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