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The Banking Regulation Act was passed by the Indian Parliament in 1949. The Banking Regulation Act, 1949 is like a rulebook for banks in India. It sets out the important rules they have to follow to keep things running smoothly. This article explores its key features, objectives, and provisions for a comprehensive understanding.
The Banking Regulation Act, 1949 supervises the banks that have been established in India. This acts as in charge of regulating and managing the operations of all banking corporations in India .
The RBI is the governing body that regulates 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.
Table of Content
The Act has been divided into five parts and comprises 56 sections. The main features of the act are mentioned below:
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.
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.
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.
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.
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.
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.
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.
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.
On the last working day, the banking companies must create a balance sheet and a profit and loss account.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
The Banking Regulation Act of 1949 is essential for governing banks in India. With its rules and objectives focused on stability, protecting depositors, and promoting good banking practices, it keeps the banking system reliable and trustworthy for everyone involved.
Section 35A of the Banking Regulation Act lets the Reserve Bank of India check and supervise cooperative banks.
The 1965 Amendment to the Banking Regulation Act made changes to include cooperative societies in banking regulations.
Section 9 of the Banking Regulation Act allows the Reserve Bank of India to give licenses to banks so they can do banking work.
The main objective is to regulate and manage the operations of all banking corporations in India.
The Central Bank or Reserve Bank of India has the authority to issue instructions to the banks in India for audits.
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.
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.
It came into force on 10 March, 1949.
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Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.
