BANKING REGULATION ACT, 1949

 Evolution

The classical function of a Central Bank in a county is to control the currency and credit of that country and to mobilise its reserves, but the constitutional structure and powers vary in details according to the prevailing economic conditions, the organisation of money and capital market, etc., in a country. A Central Banking Institution has to stimulate banking enterprises in the country. The Reserve Bank’s which a Central Bank of the country, first duty is to see that the banking business is carried on sound principles as well as to help the provision of banking facilities all over the country.

The Reserve Bank of India, which is the central bank of our nation, was established in 1935 under R.B.I. Act 1934. It took over the currency issue authority and credit control from the then Imperial Bank of India. The Bank was nationalised in 1948.

Firstly, The Banking companies Act, 1949, was passed to consolidate and amend the law relating to banking companies. The need for this was felt owing partly to the abuse of powers by persons controlling some banks and the absence of measures for safeguarding the interests of depositors of banking companies in particular and partly to the economic interests of the country. But with effect from 1-3-1966 the name of the Act has been changed to the Banking Regulation Act, 1949.

Title, extent and commencement

According to Section 1, the Act is called the Banking Regulation Act, 1949. It extends to the whole of India. It came into force on 16th March, 1949. A chit fund transaction under the Chit Fund Act, 1982 is also a banking transaction and is covered under the Banking Regulation Act. 1949.

Definition of Banking
According to Section 5(b), “banking” means the accepting of deposits of money from the public for the purpose of lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. It may be noted that “banking does not include other commercial activities carried on by a banking company”.

Section 5(c) states that “banking company” means any company which transacts the business of banking in India. According to explanation to Section 5, any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business, shall not be deemed to transact the business of banking, and therefore shall not be called a “banking company”.

Business of Banks
Section 6 provides a list of various forms of business which a banking company may do in addition to the business of banking.

Section 7 stipulates that every banking company, and no other company, shall use any of the words “bank”, “banker”, or “banking” as part of its name. Only then, it can carry on the business of banking in India.

Prohibited functions of Banks

According to Section 8 and 9, the banks cannot engage themselves in carrying on the following activities:

No banking company shall directly or indirectly deal in the buying or selling or bartering of goods, or engage in any trade.
No banking company shall buy or sell, or barter goods for others.
No banking company shall hold any immovable property howsoever acquired for more than 7 years from the acquisition thereof. However, it can hold any immovable property required for its own use.

Management of a Bank

With regard to the management of a banking company, Section 10 provides as follows:

A banking company cannot employ or be managed by a managing agent.
It cannot employ “any person” who has been adjudicated insolvent, or has been convicted by a criminal Court for any act of moral turpitude; who is a director of any other company; who is engaged in any other business or vocation; whose terra of office as a person managing the company is for more than 5 years at any one time; whose total remuneration or its part takes the form of commission or of a share in the profits of the company; and whose remuneration is excessive in the opinion of the Reserve Bank of India.
The board of directors of a banking company shall include not less than 51% of its total number of members, persons with professional or other practical experience in the matters such as accountancy, agriculture and rural economy, banking, cooperation, economics, finance, law, small scale industry, etc.
Every banking company shall be managed by a whole-time chairman who shall be entrusted with the management of the whole of its affairs. The chairman shall exercise his powers subject to the superintendence, control, and direction of the board of directors. The chairman shall be one of the directors.

Capital and Reserves

According to Section 11, the aggregate value of a banking company's in India paid-up capital and reserves shall not be less than Rs. 5 lakhs, if the bank has been established after 16th September, 1962. This minimum amount varies according to the number of places of business in one or more states and also with the nature of banks such as Indian banks and foreign banks whose branches are in India. The aggregate value of a banking company's incorporated outside India ,its paid-up capital and reserves shall not be less than Rs. 15 lakhs.

Section 12 states that the subscribed capital of a banking company cannot be less than 50% of the authorised capital, and the paid-up capital cannot be less than 50% of the subscribed capital. Further, the capital of the company shall consist of ordinary shares or equity shares only. A shareholder
 cannot exercise Ms voting rights on poll in excess of 10% of the total voting rights of all the shareholders of the banking company.The ratio is as following-

Authorised capital : Subscribed capital : Paidup capital

4:2:1

Restrictions concerning payment of dividend

According to Section 15, no bank shall pay any dividend on its shares until all its capitalised, expenses (including preliminary expenses, organisation expenses, share-selling commission, brokerage, amount of losses incurred or any other item of expenditure on intangible assets) have been completely written off. However, the bank may pay such dividends without writing off the depreciation on investment in approved securities, or the depreciation on investment in shares, debentures or bonds (other than approved securities), and the bad debts.

Section 16 prohibits common directors and states that a banking company cannot have a person as director, who is a director of any other banking company.

According to Section 17, every banking company shall create a Reserve Fund (known as Statutory Reserve Fund), and before declaring any dividend, transfer to it at least 20% of its profit each year). When the amount in the reserve fund together with the amount in the share premium account equals the paid-up capital,  then (and not before that) the Central Government on the recommendation of the Reserve Bank, can allow a banking company not
 to transfer the stipulated 20% of profit to the reserve fund. The Reserve Fund cannot be used for any purpose until it is equal to the paid-up capital. Where a banking company appropriates (uses) any amount from the Reserve Fund or the share premium account, it shall report the fact to the Reserve Bank within 21 days  of such appropriation, explaining the circumstances thereof.

Section 18 states that every unscheduled bank shall maintain a Cash reserve on daily basis with itself or in a current account with the Reserve Bank equal to at least 3% (increasable up to a maximum of 15%) of the total of its demand and time liabilities in India.

Restriction on nature of subsidiary companies

Section 19 states that a banking company cannot form any subsidiary company. However, it may establish a subsidiary company in the following circumstances:

To undertake any one or more forms of business permissible for a banking company under Section 6; or
To carry on the business of banking exclusively outside India. However, before creating a subsidiary company for this purpose, previous permission in writing of the Reserve Bank is necessary; or
To undertake such other business which the Reserve Bank may, with the prior approval of the Central Government, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in the public interest.

Restrictions on Loans and Advances
According to Section 20, the following restrictions have been laid down on loans and advances of a bank:

A bank cannot grant any loans or advances on the security of its own shares.
It cannot enter into any commitment for granting any loan or advance to or on behalf of any of its directors; any firm in which any of its directors is interested as partner, manager, employee, or guarantor; any company in which any of the directors of the bank is a director, managing agent, manager, employee, or guarantor; any company in which any of the directors of the bank holds substantial interest; or, any individual in respect of whom any of its directors is a partner or guarantor.
A bank cannot remit (mitigate or leave) the whole or any part of a loan or advance granted by it, without the previous approval of the Reserve Bank. Any remission without such approval shall be void and of no effect.

Licensing of banking companies.

Opening of new branches and transfer of existing branches

Assets, returns, information, accounts and audit

Inspection

Prohibition of certain activities in relation to banking companies

Acquisition of the undertakings of banking companies in certain cases

Suspension of business (moratorium) and winding up of banking companies

Procedure for amalgamation of banking companies

Restriction on acceptance of deposits withdrawable by cheque

Change of name of banking company

Power of Central Government to make rules

Power to exempt in certain cases

Act to apply to cooperative societies