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Banking Regulation Act, 1949

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  • The Banking Regulation Act, 1949 came into force on March 16, 1949. It contained various aspects related to banking in India.
  • This is regulatory act
  • Its purpose is to:
    • Provide safety in the interest of depositors
    • Prevent misuse of powers by managers of banks
  • Act does not supersede but supplement to Companies Act, 1956
  • Initially named Banking Companies Act, 1949 but from March 1, 1966, the name of the Act was changed to Banking Regulation Act, 1949.
  • Initially, the law was applicable only to banking companies. But, 1965 it was amended to make it applicable to cooperative banks and to introduce other changes. Primary Agricultural Credit Society and cooperative land mortgage banks are excluded from the Act. The Act provides a framework using which commercial banking in India is supervised and regulated. The Act supplements the Companies Act, 1956.
  • The Act gives the Reserve Bank of India (RBI) the power to license banks, have regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, mergers and liquidation; issue directives in the interests of public good and on banking policy, and impose penalties.
  • In 1965, the Act was amended to include cooperative banks under its purview by adding the Section 56. Cooperative banks, which operate only in one state, are formed and run by the state government. But, RBI controls the licensing and regulates the business operations. The Banking Act was a supplement to the previous acts related to banking.

The requirements regarding the minimum paid-up capital and reserves for commence mint of banking business. Prohibition of charge on unpaid capital. Payment of Dividends only after writing off all Capitalized expenses.

  • Transfer to reserve fund out of Profits. (Minimum 20 per cent) Maintenance of cash reserves by the non- scheduled banks. (Minimum 3 per cent) Restrictions on holding shares in other companies.
  • Restrictions on loans and advances to directors and others. Licensing of banking companies. Licences for opening of new branches and transfer of existing place of business. Maintenance of a percentage of liquid as sets (SLR). (Minimum 25 per cent and maximum 40 per cent)
  • Maintenance of Assets in India By a banking company. (Minimum 75 per cent of DTL) Submission of Return of unclaimed Deposits.
  • 1. Power to call for and publish the information. Preparation of Accounts and Balance Sheets. Audit of the Balance sheet and Profit & Loss Account. Publication of Audited Accounts and Balance Sheet. Inspection of books and accounts of banking companies by RBI. Giving directions to banking companies.
  • 2. Prior approval from RBI for appointment of managing directors.
  • 3. Removal of managerial and any other persons from office.
  • 4. Power of RBI to appoint additional directors
  • 5. Moratorium under the orders of a High Court.
  • 6. Winding up of banking companies.
  • 7. Scheme of amalgamation to be sanctioned by the RBI.
  • 8. Power of RBI to apply to the
  • 9. Central Government for an order of mortal rim in respect of a banking company and for a scheme of reconstruction or amalgamation.
  • 10. Power of RBI to examine the record of proceedings and tender advice in winding up proceedings.
  • 11. Power of RBI to inspect and make its report to winding up.
  • 12. Power of RBI to call for Returns and information from the Liquidator of a Banking company.
  • 13. Issue of No Objection Certificate for change of name.
  • 14. Issue of No objection certificate for the Alteration of memorandum of a banking company. Central Government to consult the RBI for making rules regarding banking companies. Recommend to the Central Government for exempting any bank from the provisions of the Banking Regulation Act 1949.
  • Requirements regarding minimum paid up capital and reserves: Sections 11 & 12:
  • Section 11 of the Banking Companies Act lays down the requirements regarding the minimum standard of paid up capital and reserves as a condition for the commencement of business. The details of this Section are given below:
  • Although Section 11 prescribes a minimum capital of Rs.5.00 lakh only, Reserve Bank currently prescribed a minimum paid-up capital of Rs.100 crore for setting up a new bank­ing company. In the case of foreign banks setting up office of business in India, they are required to bring in a minimum of ten million US dollars to India as Capital. (A million is equal to ten lakhs). The minimum capital required to start a Local Area Bank is fixed at Rs. 5.00 crores.
  • Under the provisions of Section 12, the subscribed capital of the company is not less than half of its authorized capital and the paid up capital is not less than half of its sub­scribed capital, provided when the capital is increased this proportion may be permitted to be secured within a period to be determined by the Reserve Bank not exceeding two years from the date of increase.
  • Prohibition of charge on unpaid capital: Section 14
  • Under Section 14, no banking company shall create any charge upon its unpaid capi­tal, and any such charge if created, shall be invalid.
  • Limiting the payment of dividends: Section 15
  • Section 15 prohibits every banking company from paying any dividend on its shares unless it has completely written off the capitalized expenses specified therein.

Parts and Sections of the Act

  • Part I - Preliminary
    • Section 2 to 5A
    • Section 5B: Defines 'Banking'
    • Section 5C: Defines 'Banking Company' as 'a company which transacts the business of banking in India
    • Section 6: Forms of business in which banking Companies may engage
    • Section 7: Use of words "bank", "banker", "banking" or "banking company"
    • Section 10BB: Power of Reserve Bank to appoint chairman of a banking company
    • Section 11: Requirement as to minimum paid up capital and reserves
    • Section 18: Cash Reserve
    • Section 21: Power of Reserve Bank to control advances by banking companies. Rate of interest
    • Section 21A: Rate of interest charged by banking companies cannot be subject to scrutiny of courts.
    • Section 22: Licensing of banking companies
    • Section 23: Restrictions on opening new and transfer of existing branches etc.
    • Section 27: Monthly returns to Reserve Bank
    • Section 28: Reserve Bank's power to make public certain information in the interest of the public
    • Sections 29, 30, 31: Audit
  • Section 35: Authority to inspect every banking company and its branches
  • Section 35A: Power of RBI to issue directions which every banking company in India has to follow
  • Section 36AA: RBIs power to remove managerial power from persons of office..
  • Section 36AB: RBIs power to appoint additional directors
  • Section 37: Suspension of business
  • Section 47A: RBIs power to impose penalty
  • Section 58A of Companies Act, 1956 empowers companies to accept deposits from the public
  • ...

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