Banking regulation Act 1949 - BankGyaan (2024)

What is Banking Regulation Act 1949?

Banking Regulation Act, 1949 is legislation in India that regulates all bankinginstitutions comes under RBI. Initially, the law was applicable only tobanking companies. But, in 1965 it was amended to make it applicable to cooperative banksand to introduce other changes.

Difference between RBI Act 1934 and BR Act 1949

The CentralBankof India i.e. the ReserveBankof India is governed byRBI Act,1934. Conversely, the CommercialBanks are regulated by theBanking Regulation Act 1949.

Both Acts provide guidance for Function of RBI.

Banking Regulation Act 1949 is applicable on all types of banks in India.

List of Banking Regulation Act 1949

Banking Regulation Act 1949, Section 1

Short title, extent and commencement

Banking Regulation Act 1949, Section 1, describes that Banking Regulation Act came into force on 16 March 1949 after the notification No. F.4(46) F1 /49 was published on 10 March 1949 in the Gazette of India.

Banking Regulation Act 1949, Section 3

Nothing in this Act shall apply to.-

(a) A primary agricultural credit society

(b) A co-operative land mortgage bank

Banking Regulation Act is not applicable on primary agricultural credit society and Co-operative land mortgage bank.

Banking Regulation Act 1949, Section 5

Banking Regulation Act 1949, Section 5 does Interpretation of “Bank”. This Act defines the “Bank” and “Banking Company”.

“Banking Company” means a company which transacts the business of banking.

As per banking regulation act 1949 under section 5(B) definition of bank is: “A financial institution which can accept deposit of money from the public, lend to the public and repayable to the public on demand and withdrawal by cheque, draft, order”.

As per banking regulation act 1949 under section 5(f) “Demand liabilities” means liabilities which must be met on demand, and “Time liabilities” means liabilities which are not demand liabilities. Time liabilities must be met on maturity as per pre-defined time.

Banking Regulation Act 1949, Section 6

Forms of business in which banking companies may engage

Banking Regulation Act 1949, Section 6 (1) allows the banking companies to engage in defined form of banking businesses.

Banking Regulation Act 1949, Section 7

Use of words “bank”, “banker”, “banking” or “banking company”

Banking Regulation Act 1949, Section 7 gives the permission of using the name “Bank”.

No company, firm, individual or group of individuals other than a banking company shall use as part of its name or in connection with its business any of the words “bank”, “banker” or “banking”

No company, firm, individual or group of individuals shall carry on the business of banking in India unless it uses as part of its name at least one of such words.

Banking Regulation Act 1949, Section 8

Prohibition of trading: Banks are strictly prohibited for doing risky businesses directly or indirectly.

No banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it.

Banking Regulation Act 1949, Section 9

Disposal of non-banking assets

No banking company shall hold any immovable property howsoever acquired, except such as is required for its own use.

As per Banking Regulation Act 1949, Section 9, it is strictly prohibited that No banking company can hold any movable or immovable property, such properly shall be disposed of within seven years from the acquisition or extended period, as the case may be.

Banking Regulation Act 1949, Section 10 (B) (B)

This section describes the Power of Reserve Bank to appoint Chairman of the Board of Directors appointed on a whole-time basis or a Managing Director of a banking company.

Employment of the banking company and shall hold office for such period not exceeding three years, as the Reserve Bank may specify, but shall, subject to other provisions of this Act, be eligible for reappointment.

Banking Regulation Act 1949, Section 11

Requirement as to minimum paid-up capital and reserves

Banking Regulation Act 1949, Section 11, defines the minimum paid-up capital required for getting a banking licence and keeping minimum percentage reserves of Net Demand and Time Liabilities. This minimum capital and reserve value can be changed by Reserve Bank of India.

As per Banking Regulation Act 1949, Section 11, for opening the bank branch of any foreign company in India, that company will have to deposit of Rs. Fifteen lakh (for Mumbai and Kolkata location Rs. 20 Lakh) with RBI and will have to share the 20% of annual profit generated by each branch every year.

Banking Regulation Act 1949, Section 15

Restrictions as to payment of dividend

No banking company shall pay any dividend on its shares until all its capitalised expenses (including preliminary expenses, organization expenses, share-selling commission, brokerage, amounts of losses incurred and any other item of expenditure not represented by tangible assets) have been completely written off.

Banking Regulation Act 1949, Section 16

Prohibition of common Directors

No banking company incorporated in India shall have as a Director in its Board of Directors any person who is a Director of any other banking company.

Banking Regulation Act 1949, Section 17

Reserve Fund

Every banking company incorporated in India shall create a reserve fund out of the balance of profit of each year as disclosed in the profit and loss account and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such profit.

Banking Regulation Act 1949, Section 20

Restrictions on loans and advances

No banking company shall,-

(a) Grant any loans or advances on the security of its own shares,

(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 individual in respect of whom any of its Directors is a partner or guarantor.

(iv) Any company not being a subsidiary of the banking company or a company registered under section 25 of the Companies Act, 1956 or a Government company of which 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.

Banking Regulation Act 1949, Section 20(A)

Restrictions on power to remit debts

(1) A banking company shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by-

(a) Any of its Directors,

(b) Any firm or company in which any of its Directors is interested as Director, partner, Managing agent or guarantor,

(c) Any individual if any of its Directors is his partner or guarantor.

Banking Regulation Act 1949, Section 21

Power of Reserve Bank to control advances by banking companies

It is necessary in the public interest or in the interests of depositors or banking policy. The Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular:

(a) The purposes for which advances may or may not be made

(b) The margins to be maintained in respect of secured advances

(c) The maximum amount of advances or other financial accommodation is given in regard to the paid-up capital, reserves and deposits of a banking company and other relevant considerations.

(d) The rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.

Banking Regulation Act 1949, Section 21(A)

Rates of interest charged by banking companies not to be subject to scrutiny by courts

A transaction between a banking company and its debtor shall not be re-opened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.

Banking Regulation Act 1949, Section 22 (1)

Licensing of banking companies: Banking companies get licence under Banking Regulation Act 1949, Section 22 Subsection (1)

No company shall carryon banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject of such conditions as the Reserve Bank may think fit to impose.

Banking Regulation Act 1949, Section 22 (4)

The Reserve Bank may cancel a licence granted to a banking company under this section-

• If the company ceases to carry on banking business in India
• If the company at any time fails to comply with conditions imposed upon it

Banking Regulation Act 1949, Section 22 (5)

Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government.

Banking Regulation Act 1949, Section 23

Restrictions on opening of new, and transfer of existing, places of business

Without obtaining the prior permission of the Reserve Bank-No banking company shall open a new place of business or change of business place within the same city, town or village, the location of an existing place of business situated in India.

Banking Regulation Act 1949, Section 26

Return of unclaimed deposits

• Every banking company shall, within thirty days after the close of each calendar year, submit a return in the prescribed form and manner to the Reserve Bank as at the ends of such calendar year of all accounts in India which have not been operated upon for last ten years.
• In the case of money deposited for a fixed period the said term of ten years shall be reckoned from the date of the expiry of such fixed period.

Banking Regulation Act 1949, Section 26 (A)

Establishment of Depositor Education and Awareness Fund

1. The Reserve Bank shall establish a Fund to be called the “Depositor Education and Awareness Fund”
2. Fund of those accounts in banking company which have not been operated for a period of ten years or any deposit or any amount remaining unclaimed for more than ten years, within a period of three months from the expiry of the said period of ten years, are transferred into

Depositor education and awareness fund.

Banking Regulation Act 1949, Section 29

Accounts and balance-sheet

At the expiration of each calendar year every banking company incorporated in India, in respect of all business transacted through its branches in India, shall prepare a balance-sheet and profit and loss account as on the last working day of that year or the period, as the case may be in and submit to the Reserve Bank of India.

Banking Regulation Act 1949, Section 30

Audit: The balance-sheet and profit and loss account prepared in accordance with section 29 shall be audited by a person duly qualified under any law for the time being in force to be an auditor of companies.

Banking Regulation Act 1949, Section 31

Submission of returns

The accounts and balance-sheet with the auditor’s report shall be published in the prescribed manner and three copies thereof shall be furnished as returns to the Reserve Bank within three months from the end of the period to which they refer.

Banking Regulation Act 1949, Section 35(A) (A)

Power of Central Government to authorize Reserve Bank for issuing directions to banking companies to initiate insolvency resolution process –

The Central Government may, by order, authorize the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.

Reference : “Reserve Bank of India“