Banking Regulation Act - 1949

• Act was originally called as Banking Companies Act

1949.

• It came into force from 16th March 1949.

• Now it is renamed as Banking regulation Act 1949.

 Banking Regulation Act 1949
• Introduction
• Definition
– Webster’s dictionary-bank is an institution which
deals in money an establishment ,where money is
deposited, maintained and issued…’
Dr H.L.Hart -defines ‘A banker is one who in
ordinary course of his business, honours drawn
upon him by persons from and whom he receives
money on current accounts
• Sec 5 Banking Regulation Act of 1949 – interpretation-
– S .5 (b) ‘banking’ means the accepting, for the purpose of lending or
investment , of deposits of money from public, repayable on demand
or otherwise, and withdrawal by cheque, draft, order or otherwise
• ‘Banking company’ means any company which transacts the
business of banking in India;

Explanation. — 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 as such manufacturer or trader shall not be deemed to
transact the business of banking within the meaning of this clause;
 Forms of business

Banks can only do the business which is mentioned u/s 5 (c) and 6
of the Act.

1. Main Functions/Business.
2. Subsidiary functions/Business.
Main Functions/Business:

1. The borrowing , raising or taking up money.

2. The lending of money with or without security.
3. The granting and issuing of letters of credit or various kinds, travelers cheque
etc.
4. Drawing, making, accepting, discounting, buying, selling, collecting, and
dealing in bills of exchange, hundies, promissory notes, coupons etc.
5. Buying, selling, and dealing in bullion/species.
6. The buying and selling of foreign exchange including foreign bank notes.
7. The acquiring, holding, issuing on commission , underwriting and dealing in
stock, funds, shares, debentures, bonds, securities, and investment of all
kinds.
8. The purchasing and selling of bonds, scripts, and other forms of securities on
behalf of constituents or others.
9. The negotiating of loans and advances.
10. The receiving of all kinds of loans, scripts or valuables or deposit or for safe
custody or otherwise.
11. The providing of safe deposit vaults.
12. The collecting and transmitting of money and securities.
Subsidiary Functions/Business:

1. It may act as an agent of the government, local authority or

person.
2. It may contract for public and private loans and negotiate and
issue the same.
3. Effecting, insuring, guaranteeing, underwriting, and participating
in managing and carrying out of any issue, public or private.
4. Carrying on agency business of any description.
5. It may undertake and execute trusts.
6. It may establish, support and aid associations , institutions ,
funds , trusts etc for the benefits of its present and past
employees and may grant money for charitable purposes.
7. Any other business specified by the central Government as the
lawful business of a banking company.
 Business Prohibited for banking
company(Sec 8)
• Prohibits from engaging in trading activity
directly or indirectly.
• Exceptions
– Realise security against loan.
– Connection to bill of exchange.
– Can form subsidary
• To carry banking business.
• Banking business outside India.
• Other business condusive as per opinion of RBI.
 PROVISIONS OF CAPITAL
Banking Companies Incorporated In India.

Banking Companies Incorporated Outside India.

Section-11. Requirement as to minimum paid-up capital and reserves
Incorporated in India
1. If it has,
a) A place of business in more than one state, should have an aggregate
minimum paid up capital and reserves of Rs 5,00,000.

b) Place or Places of Businesses in more than one state and any such place
is or places of businesses are in Bombay or Calcutta or both should have an
aggregate minimum paid up capital and reserves of Rs 10,00,000.

2. If it has all its business places in one state but none in Bombay or Calcutta-

• a) In Respect of the principal place of business it should have an

aggregate of minimum paid up capital and reserves of Rs 1,00,000.

•
• b) in respect of each of its other places of business situated in the
district of principal business Rs 10,000.

• c) in respect of each place of business situated elsewhere in the

state outside the same district Rs 25,000. subject to an overall limit of
5,00,000.

3. If it has only one place business and that also not in Bombay or
Calcutta, the aggregate value of paid up capital reserve should be Rs
50,000.
4. If it has all its places of business in one state, and one or more of
which is or are situated in the city of Bombay or Calcutta, it should
have an aggregate minimum paid capital and reserves of Rs 5,00,000,
plus in respect of each place of business situated outside the city of
Bombay or Calcutta Rs 25,000. Subject of an overall limit of Rs
10,00,000.
 Incorporated OUTSIDE India
If it has,
a) A place of business in Bombay or Calcutta or
Both, should have an aggregate minimum paid
up capital and reserves of Rs 20,00,000.

b) If it has No Place of Business in Bombay or

Calcutta , should have an aggregate minimum
paid up capital and reserves of Rs 15,00,000.
 Management
• 10-A. Board of Directors to include persons with professional or other experience
• (2) 51% of the total number of members of the Board of Directors of a banking
company shall consist of persons, who—
• (a) shall have special knowledge or practical experience in respect of one or more
of the following matters, namely:
– (i) accountancy
– (ii) agriculture and rural economy,
– (iii) banking,
– (iv) co-operation,
– (v) economics,
– (vi) finance,
– (vii) law,
– (viii) small-scale industry,
– (ix) any other matter, the special knowledge of, and practical experience in, which
would, in the opinion of the Reserve Bank, be useful to the banking company:
• Whole time chairman

• Chairman – Professional banker

 Chairman shall exercise his powers subject to

the superintendence, control and direction of the
Board of directors.

• Appointment by RBI
 Section – 24 Maintenance of a liquid assets

25% of total of demand and time liability in

cash gold securities to be kept. Also called
SLR.
Liability does not include
Paid up capital or reserve
Advance from RBI and any other bank notified
by the central government.
Cash to be maintained by scheduled bank
called as CRR .
 Sec- 22 licensing of banking companies
hold license
License with condition
 Writing(before or in 6 months)
 Inspection of books of the company
 Other conditions
 Present and future depositors
Management of the company- public interest
Adequate capital structure
Granting license- public interest, monetary stability
and economic growth
Other condition in the opinion of RBI
 20. Restrictions on loans and
advances
banking company shall not
• (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
– (iv) any individual in respect of whom any of its directors
is a partner or guarantor
21. Power of Reserve Bank to control advances by
banking companies
Public interest or
interest of depositors or
banking policy
RBI directions- Sec 21 (2) (a) to (e)
Purpose
Margins –secured advances
Max amount of advances-paid up capital reserves
Max amount-guarantees
Rate of interest
 Opening new branch(23)
• RBI prior approval in India or outside India.
• No permission if temporary opening of branch.
• Factors to open branch
– Financial condition history
– Character of its management
– Capital adequacy.
– Public interest.

– Permission can be revoked anytime if do not comply

with RBI guidelines.
 Inspection of banks(sec 35)
• RBI conduct inspection of
– Books of accounts
– All members are in obligation to produce all
information
– Inspection on direction of central government.
– RBI send copy of report to bank and govt.
– If working in depositor interest then send
representation to bank.
– If not reasonable
• Prohibit receiving deposits
• Winding up u/s/ 38.