Banking Regulation Act, 1949: Features, Objectives and Provisions

What is Banking Regulation Act, 1949?

Banking Regulation Act, 1949 regulates and supervises the banks that have been established in India. India’s Banking Regulation Act, 1949 makes laws concerning banking companies in India. This acts as in charge of regulating and managing the operations of all banking corporations in India. The Banking Regulation Act, 1949 is an act for regulating the banks in India.

The RBI is the governing body that regulates and supervises the banks. The introduction of Section 56, gave the Reserve Bank of India the authority to regulate its operations in the same way other banks in the country are functioning. This Act also gives RBI, the authority to license banks, regulate shareholder voting and shareholding, oversee board and management appointments, and set auditing instructions. RBI is also involved in mergers and liquidations of the banks.

Geeky Takeaways:

• It was observed that earlier provisions regulating banking firms in India were insufficient and unsatisfactory. It was determined that India required a specialized law to address banking operations comprehensively.
• The main features of the Banking Regulation Act, 1949 include limiting dividend payments, establishing minimum capital levels, preventing non-banking entities from accepting repayable deposits, and prohibiting trading to eliminate non-banking asset threats and comprises 56 provisions.
• In addition, a comprehensive overview of banking would include all entities that accept deposits for lending or investing, whether or not they are repayable on demand, come under the authority of this law.

Features of the Banking Regulation Act, 1949

The Act has been divided into five parts and comprises 56 sections. The main features of the act are mentioned below:

• It prevents non-banking enterprises from taking demand-repayable deposits.
• It restricts trading related to non-banking entities to remove potential risks.
• It also establishes minimum capital requirements for the bank.
• It limits dividend payouts of the bank.
• This act provides the legal framework for banks registered outside of India’s provinces.
• It helps in implementing an extensive licensing program for banks and their branches.
• It determines a unique format for the balance sheet and gives the Reserve Bank authority to call for periodic reports.
• This act gives the Reserve Bank the right to examine a bank’s books of accounts.
• Enabling the central government, the authority to take action against banks that conduct in a way that harms depositors’ interests.
• A clause that calls for the Reserve Bank of India to communicate with banking institutions regularly.
• This act also establishes a quick liquidation procedure for the bank.
• It increases the capability of the Reserve Bank of India to assist banking institutions when emergencies arise.

Objectives of the Banking Regulation Act, 1949

• To prevent banking companies from engaging in fierce competition, this act regulated the opening of new branches and the relocating of existing ones.
• To ensure the balanced growth of banks through a licensing system and to stop the indiscriminate openings of additional branches.
• To assign RBI the authority to appoint, remove, and reappoint the chairman, directors, and bank officers. This might help in the effective and smooth functioning of Indian banks.
• To safeguard the interests of depositors and the general public by implementing certain measures which include maintaining ratios for cash reserve and liquidity reserve. This enables the bank to meet the demand of depositors.
• To strengthen India’s financial system by mandating the merging of weaker banks with senior banks.
• To include certain clauses that can limit the ability of foreign banks to invest funds from Indian depositors outside of India.
• To assist banks in quick and easy liquidation when they are unable to continue or merge with other banks.

Important Provisions of the Banking Regulation Act, 1949

1. Definitions

The Banking Regulations Act, 1949 provides definitions for several terminology, including branch offices, banking companies, and banking. Under this act, a company engaged in banking activities within India is called a Banking Company. Bank includes the acceptance of public deposits of money for lending or investment that can be repaid on demand. As per the State Bank of India (Subsidiary Banks) Act, 1959, subsidiary banks are defined in the same way. An advance or loan secured against the security of assets is a secured loan or advance.

2. Business which can be undertaken by the Banking Companies

A banking company may engage in the following activities under Section 6(1): borrowing or lending money; purchasing or disposing of bills of exchange, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, and debentures; trading in stocks and funds; and buying or selling foreign exchange bonds, debentures; managing agency activities such as clearance and shipment of goods; managing guarantee and indemnity, etc.

3. Prohibition of Trading

As per Section 8 of this Act, Trading is not permitted. Banking companies are prohibited from engaging in the purchasing, selling, or bartering of products unless they are selling goods held in its security. In addition, the bank is prohibited from trading, buying, selling, or bartering anything other than bills of exchange that are obtained through negotiation or collection.

4. Management of Bank

As specified by Section 10 of the Act, the bank should not employ managing partners or be employed by them. An individual whose compensation is dependent on the company’s profitability or who has been declared insolvent should not be employed by the bank. A minimum of 51% of the board’s members must have professional expertise in fields such as accounting, small-scale industry, banking, cooperatives, agriculture, rural economy, economics, and finance. In addition, the director’s tenure should not exceed eight years.

5. Minimum Paid-up Capital and Reserves

According to Section 11, a banking company’s paid-up capital should not be more than Fifteen Lakhs if it was incorporated outside of India, and Twenty Lakhs if it holds its principal place of business in Calcutta, Bombay, or both.

The banking company is required to deposit 20% of its annual profit. The minimum paid-up capital required for a company that is incorporated in India and has branches in multiple states is five lakhs of rupees. If the company’s place of business is located in Bombay, Calcutta, or both, it must have ten lakhs of rupees as minimum paid-up capital. If a company maintains all of its branches within the same state, none of which are located in Bombay or Calcutta, the paid-up capital requirement is one lakh rupees for the company’s principal place of business, ten thousand rupees for each branch located within the same district as the principal place of business, and twenty-five thousand rupees for each branch located outside of the same district. The company’s paid-up capital and subscribed capital cannot be less than half of the authorised capital or subscribed capital, respectively. The bank can not place a charge on unpaid capital. A minimum of twenty percent of the company’s annual profits must be transferred to the Reserve Fund.  The banking company is required to notify the RBI of the Reserve Fund’s allocation within twenty-one days of the date of appropriation.

6. Limitations on the Nature of Subsidiary Companies

A Banking Company should not establish a subsidiary unless the company is being used for a business venture or the Reserve Bank of India has granted written permission. The banking company can hold up to 30% of the company’s paid-up share capital or its own paid-up capital.

7. Licensing of Banking Companies

Banking companies are not permitted to conduct business in India unless they hold an RBI license. The RBI can grant the license after the books of accounts have been inspected. If the company stops conducting banking operations in India, RBI has the authority to terminate the license.

8. Opening of New Branches and Transfer of Existing Branches

A Banking Company must have RBI approval before starting a new branch or moving an existing branch to a new city, town, or state. Without RBI’s prior approval, no banking company with its headquarters in India may operate a new branch outside of the country. On the other hand, a new branch may open for only a short period of not more than a month.

9. Accounts and Balance Sheet

On the last working day, the banking companies must create a balance sheet and a profit and loss account.

10. Inspection

RBI has the authority to order a banking company inspection and is required to send the company a report. The directors must bring all books, accounts, and documents related to the banking company must be submitted for investigation.

11. RBI’s Authority to give Instructions

If RBI believes that giving instructions to a banking company is in the public interest or will prevent the company from conducting harmful business, it may do so regularly.

12. Prohibition of Specific Operations by the Banking Company

The banking company is not allowed to prevent anyone from entering its location of business. It is not permitted to keep anything violent in the workplace. If the bank violates any of the mentioned acts, it is accountable under Section 36AD.

13. Powers and Functions of RBI

The powers of RBI are mentioned in Section 36. The Reserve Bank has the authority to advise banking companies and prevent them from engaging in certain transactions. Further, as per Section 18, it can help the banking institution by providing advances or loans. Reserve Bank of India can also order the banking company to organise a meeting of its directors to consider company issues. It may also designate officials to look after the operations of a banking company.

14. Business Suspension

The financial company may request a pause in operations from the High Court if it is unable to fulfill its obligations temporarily. The High Court may approve the pause in action and put an end to the proceedings temporarily. The pause in operations cannot last more than six months. The RBI report certifies that the banking company will be able to pay its debts is the only way that makes the banking company valid.

15. Acquisition of the Undertakings of Banking Companies

The central government must establish banking companies after consultation with the Reserve Bank of India. The process can be completed once the financial businesses have been given the chance to show their reasons for carrying the business.

16. Payment of Dividends

Banking companies must pay dividends only when all the capital expenses have been paid. Dividends must not be paid until the value of investments in approved securities, shares, bonds, or debentures has declined and is written off.

17. Reserve Fund

Every single banking company is required to establish a reserve fund and allocate at least 20% of its profits to it. If the bank appropriates any funds from the reserve fund, it must inform the Reserve Bank.

18. Power of Central Government with Respect of the Liquidation of Companies

If the banking companies have violated the Insolvency and Bankruptcy Code, of 2016 the Central Government may direct the RBI to start the process of insolvency.

Offences and Punishments under the Banking Regulation Act, 1949

The Act contains several provisions which describe the consequences of violation of the act, including fines and imprisonment of the same. The following is mentioned in Section 46:

• In case a person purposefully presents false information or promotes fraudulent acts, they risk imprisonment of up to three years and a fine of up to one crore rupees.
• In case a person does not share the records or documents or refuses to answer the inquiries of the inspection officer, then a fine of up to twenty lakh rupees, and another fine of fifty thousand rupees in case of continuing offence.
• In case the banking company has received any deposits illegally, all of the directors will be held accountable and charged twice the value of the deposits made with the banking company.
• In case there is a default and it is caused by the banking company, or by directors’ negligence, then the directors or the secretary will be held responsible for the same.

Conclusion

The Banking Regulation Act, 1949 is an act that governs all banking companies in the countries. It is now applicable to cooperative banks after an amendment. It provides controller, supervisor, and regulator positions to the Reserve Bank of India. The act aims to protect the interests of depositors by increasing the liabilities of the bank. Thus, the act aims in the proper growth of the banking companies which was lacking earlier.

Banking Regulation Act, 1949- FAQs

What is the main objective of Banking Regulation Act, 1949?

The main objective is to regulate and manage the operations of all banking corporations in India.

Who has the authority to issue instructions to the banks in India for audits?

The Central Bank or Reserve Bank of India has the authority to issue instructions to the banks in India for audits.

Describe the roles that RBI has to perform under the Banking Regulation Act of 1949?

As per Banking Regulation Act, 1949, RBI acts as a regulator, controller and supervisor. It generates license to various banks, issue instructions to the banks for audits, regulates the functioning of the banks and if required, facilitates quick mergers and acquisitions.

Who is known as the Father of the Bank?

The father of the bank is Maidavolu Narasimham. He established first bank and was also appointed as the 13^th governor of the Reserve Bank of India.

What is the enactment date of the Banking Regulation Act, 1949?

It came into force on 10 March, 1949.