Banking Regulation Act 1949

Banking Legislations & Reforms -1

Banking Regulation Act, 1949

• Sec 6: Prohibits banking companies from trading & speculative activities.

Failure of Indian Specie Bank in 1914 – Lost `111 lacs in silver speculation, ` 36 lacs in advances against pearls


• Sec 7 amended in 1963: Prohibits the use of ‘bank’, ‘banking company’, ‘banking’ to a firm, company, individual other than banking company


• Sec 11 amended in 1962: Minimum paid up capital is ` 5 lacs which was earlier `

50,000. Minimum paid up capital is ` 10 lacs if the bank has offices

in Mumbai or Kolkatta. As per guidelines issued by RBI in Jan.1993, Minimum paid

up capital is ` 100 cr for a new private sector bank. The same has now been increased to ` 200 cr.

Minimum paid up capital is ` 5 cr for a local area bank


• Sec 17 amended in 1962 further amended in 2001: Transfer 25% of net profit (before appropriations) after adjustment /provision towards bonus of staff to reserve fund

To act as a brake on the policy of declaring large dividends to satisfy the shareholders thus undermining sound banking principles.


• Sec 12 (1): The subscribed capital must not be less than ½ of the authorised capital and the paid up capital must not be less than ½ of the subscribed capital

To avoid the unscrupulous banks to mislead the ignorant public.


• Sec 12: Maximum voting rights of a shareholder on poll in respect of any shares held by him are limited to 1% of total rights of all the shareholders of the banking company. This has now been increased to 10%.


• Sec 16: No banking company incorporated in India shall have as director any person who is director of another banking company


• Sec 20: Prohibit to make any advances on security of its own shares, give loans to any director , firms or private concerns in which the bank or any of the director is partner or managing agent.

People’s Bank in loan when closed its operations had ` 86 lacs out of total depoists of ` 1 cr as advances in which MD was personally interested


• Sec 24: SLR 25% of the total demand & time liabilities

In Gold, cash, tangible securities valued at market price

Banking Regulation Act – Powers of RBI

• Sec 21: Empowers RBI to direct

1. Where advances may be made or not

2. What margins to be maintained

3. What rate of interest to be charged

4. What maximum amount of advances or guarantees to be given on behalf of a company, individual or association of persons


• Sec 22: Every bank requires to obtain licence from RBI, also authorised to cancel the licence

Mainly to check mushrooming of unsound banks. RBI inspects the institution affairs and satisfies that it is in a position to repay the depositors


• Regulate the appointment and remuneration of senior officers in banks


• RBI is empowered to inspect any banking company at any time, call for a meeting of directors and change the management if desirable


• RBI is empowered to apply to High Court for the winding up of any banking company


• RBI is required to make annual report for Central Government on the trend & progress of banking in the country, including its suggestions, if any, for strengthening of the banking business.


• The bank has to disclose all the undisclosed reserves that the bank has to RBI.

Undisclosed reserves are not published by the bank in the annual reports.

Banking Companies (Second Amendment) Act,1960

• For any reconstruction /rehabilitation of a bank in difficulty, the RBI can sanction a scheme and temporary moratorium be arranged from Central Government.

All the creditors and depositors are paid from the moratorium received by the Bank.

Banking Companies (Amendment) Act,1961

• RBI has powers to formulate and carry out with the sanction of the Government, scheme of reconstruction & compulsory amalgamation of sub-standard banks with a well managed institution

Employees, assets as well liabilities shall be absorbed by the transferee bank


I. To strengthen banking system

II. To enable scheduled banks to provide larger credit to exporters for a longer period


1. Statutory Cash Balances: Sec 42 of RBI Act, 3% -15% of demand and time liabilities should be maintained with RBI

2. Liquidity ratio: Earlier 20%, now increased to 25%.

3. Capital Funds: 25% of net profit before appr transferred to reserves after providing for employee bonus.

4. Credit Information: RBI collects credit information from banks.


5. Export Finance: BOP accepted by RBI, maturity period increased from 90 to 180 days. RBI provides special accommodations to banks if it is for the purpose of financing exports.

Banking Law (Miscellaneous Provisions) Act, 1963

Prohibit the issue of any prospectus or advertisement by any non-banking institution soliciting any deposits from the public or any advertising on receipts of such deposits.

The amount collected, rate of interest and payback period need to be conveyed to RBI

Annual Balance Sheet & P&L should be send to every deposit holder.

Banking Law (Application to Cooperative Societies) Act, 1966

Came into force on 1st March applicable to• State Cooperative Banks• Central Cooperative Banks• Urban cooperative banks (non-agricultural

credit societies)

They are eligible to borrow from RBI in emergency, 3% CRR, 25% SLR, prohibited unsecured loans to directors, fall under various selective credit controls, need licence to start a branch to help proper coordinate between commercial and cooperative banks

Deposit Insurance Cooperation Act, 1962

Main Objective: Give a measure of protection to depositors, assurance of safety that helps in active development of banking , reduce panicky withdrawals.

Authorised capital:` 1 cr. Fully paid up by RBI, can borrow max. ` 5 cr from RBI.

Deposit Insurance Corporation Act, 1962

Maintain separate Deposit Insurance Fund:

All premiums received by Corporation

All amounts received from liquidators

Amounts transferred to the Fund from general Reserves

Advances from RBI

All incomes from investments made out of the Fund


Deposit Insurance Fund is used to:

Make payments in respect of insured deposits

Meet liabilities in respect of advance taken from RBI

Meet liabilities in respect of amount transferred to the Fund from general reserve


The Corporation is required to invest only in Central Government sercurities and treat RBI as its sole banker


Management of the Corporation consists of:

1. Governor of RBI

2. Deputy Governor of RBI

3. An officer of the Central Government

4. 2 directors nominated by CG with consultation with RBI having special knowledge of commercial banking, tenure 4years

Liability of the Corporation in respect of Insured Depositors

1. Pay every depositor not more than `1,00,000, earlier amount being ` 1500, in case of liquidation, winding up, reconstruction or amalgamation in 5 months from the date of winding up and before expiry of 2 months on receipt of such list from the liquidator.

2. The Corporation is entitled to reimburse itself for such payment from the assets of the insured bank

Deposit Insurance Corporation

Deposit Insurance Corporation has been renamed as Deposit Insurance and Credit Guarantee Corporation (DICGC)

Differential Interest rates (DIR)

Selected low income group who deserve financial assistance for productive endeavour but cannot easily negotiate with the banks, RBI appointed Dr. Hazari to examine the question of DIR.

Differential Interest rates (DIR) Implementations

1. Lend min. 1% of bank loans

2. Assist 7 lacs to 15 lacs people

3. Grant 2/3rd the total loan to rural and semi urban areas.

4. Give 1/3rd of the total loans to scheduled castes and tribes

5. Charge interest rate 4%.

6. Loans only to people not eligible for subsidy-linked schemes

Differential Interest rates (DIR) Implementations

7. Annual family income Rs.6400 in rural areas and Rs.7200 in urban and semi urban areas.

• Disposal of immovable property (Sec.9)• Management (Sec.10)• Commission on sale of shares (Sec.13)• Return of unclaimed deposits (Sec.26)

Important Provisions Concerning Conduct of Banking Business in India

Documents

Banking Regulation Act 1949