The Banking Regulation Act, 1949 is a legislation in India that regulates all banking firms in India. Passed as the Banking Companies Act 1949, it came into force from 16 March 1949 and changed to Banking Regulation Act 1949 from 1 March 1966. It is applicable in jammu and Kashmir from 1956. Initially, the law was applicable only to banking companies. But, 1965 it was amended to make it applicable to cooperative banks and to introduce other changes
The Act provides a framework under which commercial banking in India is supervised and regulated. The Act supplements the Companies Act, 1956. Primary Agricultural Credit Societyand cooperative land mortgage banks are excluded from the Act.
The Act gives the Reserve Bank of India (RBI) the power to license banks, have regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, mergers and liquidation; issue directives in the interests of public good and on banking policy, and impose penalties.
In 1965, the Act was amended to include cooperative banks under its purview by adding the Section 56. Cooperative banks, which operate only in one state, are formed and run by the state government. But, RBI controls the licensing and regulates the business operations. The Banking Act was a supplement to the previous acts related to banking.
As per Section 5(c) of the Banking Regulation Act, 1949 a “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 the deposits of money from 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.”
As per Section 5(b) of the Banking Regulation Act, 1949, “banking” means the 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.
As per Section 5(d) of the Banking Regulation Act, 1949, “company” means any company as defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the meaning of Section 591 of that Act.
As per section 51 of the Banking Regulation Act, 1949, certain provisions of the Banking Regulation Act are also applicable to the State Bank of India, any corresponding new bank, a regional rural bank and any subsidiary bank. “Corresponding new bank” has been defined under clause(ee) of section 2 of the DICGC Act to mean a corresponding new bank constituted under the Banking Companies (Acquisition and Transfer of Undertakings ) Acts of 1970 or 1980.
The banking regulation act 1949 extends to the entire nation. Other acts are used as secondary to this act e.g. negotiable instrument act, Companies Act 1956. Passed as the Banking Companies Act 1949, it came into force wef 16 March 1949 and changed to Banking Regulations Act 1949 wef 01.03.1966, it was made applicable to Jammu & Kashmir in the year 1956. The Banking Regulation Act is not pertinent to primary agricultural credit societies, non-agricultural primary credit societies and cooperative land mortgage banks.
Banking refers to accepting the deposits of money from public. The deposits are accepted for the purpose of investing, lending and repayable on demand and such money can be withdrawn by draft, cheque, etc.
Banking Company is a company which transacts the business of banking in India. This company fulfils the state of affairs of being a company as given in companies’ act 1956.
Business allowed for a banking company (Section 6)
- Lending/Borrowing of money with/ without security, issuing travellers’ cheque, buying & selling foreign exchange notes, deposits vaults, collecting & transmitting of money & securities, buying bonds and other securities on the behalf of customers.
• Transacting and carrying on every kind of guarantee & indemnity business.
• Selling, managing & realizing any property which comes in possession of the bank in procedure of settlements of claims.
• Executing and undertaking of trusts
• Other works which are advancements of main purpose of the company or incidental
• A form of business that is defined by the Central Government in its issued notification
Prohibition on trading (Section 8)
A banking company cannot get in directly or indirectly contracts in buying or selling or exchange of goods.
Disposal of Non Banking assets (Section 9)
Banks cannot hold any property for more than 7 years for the purpose of settlements of debts or obligations. Such time limit of 7 years can be augmented by the Reserve Bank of India for another 5 years, if it thinks appropriate.
Reserve fund (section 17)
Every banking company must generate a reserve fund out of its earnings after tax and interest. Such reserve amount should be at any rate 20 percent of such profits. Exemption can be provided only if the cumulative amount of reserve fund & securities premium is greater than the paid up capital of the company.
Cash reserve (Section 18)
Atleast 3 percent of the total demand & time liabilities should be kept as cash reserve or should be secured in current account with Reserve Bank of India. Liabilities will not comprise monies received from Reserve Bank of India/ EXIM bank/ Development bank or any such other bank. Such amount should be deposited/ kept on last Friday of every 2nd fortnight of every month. The return should be deposited before twentieth day of every month stating the particulars of amount deposited to Reserve Bank of India.
Accounts & balance sheet (Section 29)
Banking companies should plan balance sheet and profit & loss account on last working day of every accounting year in the forms set out in third schedule. Accounts must be signed by atleast three directors where number of directors exceeds three. If number of directors’ fall short of three, then all directors must sign the accounts. In case of banking company incorporated outside the nation, accounts must be signed by principal officer or manager of the company in India.
Auditing of Banking Company (section 30)
- Balance sheet and Profit & Loss made compliant with section 29 must be audited by a person qualified under law to discharge his duties as an auditor
• The banking company must obtain the approval of Reserve Bank of India before removing/ appointing and re – appointment of auditors.
• When Reserve Bank of India is not satisfied with financial statements of the bank, it can give order for carrying out a special audit. And cost of such special audit must be put up by the banking company itself.
• The liabilities, powers and scope of the auditor are same as given in section 227 of companies act 1956.
Additional disclosure requirements
- Whether the details given are correct & present fair and true view, whether transactions done by the company comes under the purview of companies powers.
• Safety of assets
• Any other matter which needs to be disclosed
• Such report of auditor must be submitted to Reserve Bank of India in three copies in prescribed manner. Reserve Bank of India may extend the period of three months for furnishing of such returns, if Reserve Bank of India finds it justified to do so.
The banks are the custodians of savings and powerful institutions to provide credit. They mobilise the resources from all the sections of the community by way of deposits and channelise them to industries and others by way of granting loans. In 1955 the Imperial Bank of India was nationalised and SBI was constituted.
It was observed that the commercial banks were directing their advances to the large and medium scale industries and the priority sectors such as agriculture, small-scale industries and exports were neglected.
The chairmen and directors of banks were mostly industrialists and many of them were interested in sanctioning large amount of loans and advances to the industries with which they were connected.
To overcome these deficiencies found in the working of the banks, the Banking Laws (Amendment) Act was passed in December 1968 and came into force on 1-2-1969. It is known as the scheme of ‘social control’ over the banks.
The then deputy Prime Minister, Mr. Morarji Desai made a statement in the Parliament on the eve of introducing the bill to amend the banking laws Act.
He explained that the aim of social control was, “to regulate our social and economic life so as to attain the optimum growth rate for our economy and to prevent at the same time monopolistic trend, concentration of economic power and misdirection of resources”.
The following are the main provisions of this amendment,
Bigger banks had to be managed by whole time chairman possessing special knowledge and practical experience of the working of a banking company or of finance, economics or business administration.
The majority of directors had to be persons with special knowledge or practical experience in any of the areas such as accountancy, agriculture and rural economy, banking, co-operative, economics, finance, law, small scale industries etc.
The banks were also prohibited from making any loans or advances, secured or unsecured to their directors or to any companies in which they have substantial interest.