THE BANKING REGULATION ACT,1949

Preamble of regulatory Act

• An Act to consolidate and amend the law relating to banking.

• WHEREAS it is expedient to consolidate and amend the law relating to banking .

IntroductionThe Banking companies act, presently known as banking regulation act was enacted owing to safeguard the interest of depositors, control abuse of power by some bank personnel controlling the banks in particular and to the interest of Indian economy in general.

The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into force w.e.f 16.3.49. Subsequently it was changed to Banking Regulations Act 1949 wef 01.03.66.

However, it should be remembered that this act does not supersede the provision of companies act or any other law for the time being in force in respect of banking business.

Definition of banks

In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a company which transacts the business of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order or otherwise.'

This definition points to the three primary activities of a commercial bank which distinguish it from the other financial institutions. These are: (i) maintaining deposit accounts including current accounts, (ii) issue and pay cheques, and (iii) collect cheques for the bank's customer

Different provisions of Banking regulations Act

S. No. Parts Topics Sections covered

1. I Preliminary 1 to 5A

2. II Business of Banking Companies 6 to 36 A

3. IIA Control over management 36AA to 36AC

4. IIB Prohibition of certain activities in relation to banking Companies

36AD

5. IIC Acquisition of the undertakings of Banking Companies in certain cases

36AE to 36AJ

6. III Suspension of business and winding up of Banking Companies

36B to 45

7. IIIA Speedy provision for speedy disposal of winding up proceedings

45A to 45X

8. IIIB Provision relating to certain operation of Banking Companies

45Y to 45ZF

9. IV Miscellaneous 46 to 55A

10. V Application of the Act to cooperative Banks 56

Applicability of the Banking Regulation Act, 1949

This Act applies to following categories of Banks:

1: Nationalized Banks

2: Non-Nationalized Banks

Cooperative Banks

Business of banking CompaniesSection 6(1) and 6(2) r.w. 56(b)

• Borrowing, raising or taking of money

• Giving advance• Bills business• L/C , Bank Guarantee, Indemnity• Foreign exchange• Providing safe deposit vaults

Continued…

• Collecting and transmitting money• Managing, selling and realizing any property that may

come into the possession of the bank in satisfaction or part satisfaction of any of its dues

• Acquiring, holding and dealing with any property or any right, title or interest in any such property that may form the security or part of the security for any loans or advances or which may be connected with such security

• Undertaking and executing trusts

Continued…

• Acquiring, constructing, maintaining and altering of any building for the purpose of the bank

• Acquiring and undertaking the whole or part of the business of any person or bank / company if its nature of business is as per the allowed business for the bank

• Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the bank

• Any other business the Central Govt. may by notification specify as a allowed business

• Banks are prohibited to do any other business

Use of words bank, banker, banking or banking company

(1) No company other than a banking company shall use as part of its name 15[or, in connection with its business] any of the words bank, banker or banking and no company

shall carry on the business of banking in India unless it uses as part of its name at least one of such words.

(2) No firm, individual or group of individuals shall, for the purpose of carrying on any business, use as part of its or his name any of the words bank, banking or banking

company.

(3) Nothing in this section shall apply to-

(a) a subsidiary of a banking company formed for one or more of the purposes mentioned in sub-section (1) of section 19, whose name indicates that it is a subsidiary of that banking

company;

(b) any association of banks formed for the protection of their mutual interests and registered under section 25 of the Companies Act, 1956 (1 of 1956).]

Applicability against other laws

• Provisions of the Banking regulation Act, 1949 are not in substitution of other laws applicable, unless otherwise expressly said (Section 2 sub 56 (b)

• Act is not applicable to– 1 Primary Agricultural Society– 2 Co-operative Land Mortgage Bank– 3 Any other co-operative society except as provided by

Sec. 56(Section 3)

Banking Policy

“Banking Policy”means policy specified by RBI from time to time in the interest of

-Banking system

-Monitory stability

-Sound economic growth

-Interest of depositors

-Volume of deposits and other resources of the bank

-Efficient use of the deposits and resources …..Section 5(ca)

Cash Reserve (CRR)Section 18 r. w. 56 (j)

Every bank is required to keep cash reserve, with itself or by way of balance in the current account with RBI or Central / District Co-operative Bank or net balance in all such way, of minimum prescribed % amount of its DTL as of last Friday of fortnight

A return about this has to be submitted to RBI before 15thof each month about alternate Friday

SLR(Statutory Liquidity Ratio)

Bank shall maintain unencumbered approved

securities, valued not exceeding the current market price, or an amount which shall not be less

than 24% of the total of its demand and time liabilities

(DTL)

Restrictions on loans and advances

• —(1) Notwithstanding anything to the contrary contained in section 77 of the Companies Act, 1956 (1 of 1956), no banking company shall,—

• (a) grant any loans or advances on the security of its own shares, or— • (b) enter into any commitment for granting any loan or advance to or on behalf of

— • (i) any of its directors, • (ii) any firm in which any of its directors is interested as partner, manager,

employee or guarantor, or • (iii) any company [not being a subsidiary of the banking company or a company

registered under section 25 of the Companies Act, 1956 (1 of 1956), or a Government company] of which 61[or the subsidiary or the holding company of which] any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or

• (iv) any individual in respect of whom any of its directors is a partner or guarantor.

Licensing of banking companies

68[(1) Save as hereinafter provided, no company shall carry on banking business in India unless it holds a

licence issued in that behalf by the Reserve Bank and any such licence

may be issued subject of such conditions as the Reserve Bank may

think fit to impose.]

(2) Every banking company in existence on the commencement of

this Act, before the expiry of six months from such commencement,

and every other company before commencing banking business 69[in India], shall apply in writing to the

Reserve Bank for a licence under this section.

Power to publish information

The Reserve Bank or the National Bank, or both, if they consider it in the public interest so to do, may publish any information obtained by them under this Act in such consolidated form as they think fit.

Power of the Reserve Bank to give directions

• (a) in the 134[public interest]; or • 135[(aa) in the interest of banking policy; or] • (b) to prevent the affairs of any banking company being

conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or

• (c) to secure the proper management of any banking company generally,

• it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(1) Where the

Reserve Bank is

satisfied that—

Continued….

(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.

Amendments of provisions relating to appointments of managing directors, etc., to be subject to previous approval

of the Reserve Bank.

• no amendment of any provision relating to the maximum permissible number of directors .

• no appointment or re-appointment or termination of appointment of a chairman.

• Further powers and functions of Reserve Banks. • 1.(a) caution or prohibit banking companies or any banking company in

particular against entering into any particular transaction or class of transactions, and generally give advice to any banking company;

• (b) on a request by the companies concerned and subject to the provision of section 149[44A], assist, as intermediary or otherwise, in proposals for the amalgamation of such banking companies;

• (c) give assistance to any banking company by means of the grant of a loan or advance to it underclause (3) of sub-section (1) of section 18 of the Reserve Bank of India Act, 1934 (2 of 1934);

(2) The Reserve Bank shall make an annual report to the Central Government on the trend and progress of banking in the country, with particular reference to its activities under clause (2) of section 17 of the Reserve Bank of India Act, 1934 (2 of 1934), including in such report its suggestions, if any, for the strengthening of banking business throughout the country.

(3) The Reserve Bank may appoint such staff at such places as it considers necessary for the scrutiny of the returns, statements and information furnished by banking companies under this Act, and generally to ensure the efficient performance of its functions under this Act.

Certain provisions of the Act not to apply to certain banking companies.

(1) The provisions of section II, sub-section (1) of section 12, and sections 17, 18, 24 and 25 shall not apply to a banking company— • (a) which, whether before or after the commencement of the Banking Companies

(Amendment) Act, 1959 (33 of 1959), has been refused a licence under section 22, or prohibited from accepting fresh deposits by a compromise, arrangement or scheme sanctioned by a court or by any order made in any proceeding relating to such compromise, arrangement or scheme, or prohibited from accepting deposits by virtue of any alteration made in its memorandum; or

• (b) whose licence has been cancelled under section 22, whether before or after the commencement of the Banking Companies (Amendment) Act, 1959 (33 of 1959).

• (2) Where the Reserve Bank is satisfied that any such banking company as is referred to in sub-section (1) has repaid, or has made adequate provision for repaying all deposits accepted by the banking company, either in full or to the maximum extent possible, the Reserve Bank may, by notice published in the Official Gazette, notify that the banking company has ceased to be a banking company within the meaning of this Act, and thereupon all the provisions of this Act applicable to such banking company shall cease to apply to it, except as respects things done or omitted to be done before such notice.]

CONTROL OVER MANAGEMENT

36AA. Power of Reserve Bank to remove managerial and other persons from office.

(a)36AAA. Supersession of Board of directors of a multi-State co-operative bank.

(b)36AAB. Order of winding up of multi-State co-operative bank to be final in certain cases

(c)Reimbursement to Deposit Insurance Corporation by liquidator or transferee bank

36AB. Power of Reserve Bank to appoint additional directors,

36AC. Part IIA to override other laws.

36AD. Punishments for certain activities in relation to banking companies.

SUSPENSION OF BUSINESS AND WINDING UP OF BANKING COMPANIES

High Court defined.

Suspension of business.

Winding up by High Court.

Court liquidator.

Reserve Bank to be official liquidator.

Application of Companies Act to liquidators.

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