1.

INTRODUCTION
A banking company means and includes any company which carries on business or which
transacts banking business in India. A banking businessis generally governed by the provisions of the
Companies Act 1956 andspecifically by the Banking Regulation Act. The Banking regulation
Actof 1949 came into force on 16
th
March 1949 as a result of long-felt need toregulate the banking business in India and protect the
interest of number of depositors.The existence of well- organized, regulated and efficient
banking systemis pre-requisite for economic growth. Banks are agencies responsible
for mobilizing and channeling of funds in a country. The major institutionscarrying business,in
India, include:(a)Nationalized banks(b)State bank of India and Associates banks(c)Foreign banks
having branches in India(d) Co-operative banks(e)Rural banks and(f)Private sector banks

2. DEFINITION AND FUNCTIONS OF A BANK

Banking has been defined by section 5 of the Banking Regulation Act and means:(a)accepting deposits of
money from public
(b)
for the purpose of lending or investment and deposits are repayable on demand or otherwise
by cheque, draft, and order or otherwise. It should be noted that company which is engaged in
manufacturing goods and for the purpose of financing business accepts
depositsf r o m t h e p u b l i c s h o u l d n o t b e d e e m e d t o t r a n s a c t b u s i n e s s o f
banking.In addition to banking business, a bank is permitted under Section 6 of the Banking
Regulation Act to engage in certain class of business which isincidental to the business of
banking. Section 8 of the Banking Regulation Act prohibits a bank from buying and selling or dealing in
goods except inconnection with realization of a security held by it or in connection with the
business of collections or negotiating bills of exchange.Some of the main functions of modern commercial
banks are:
(a)
Accepting deposits and providing facilities to depositors of payment by cheques.
(b)
Granting loans and advances (cash credits, overdraft, term loans,etc.).
(c)
D e a l i n g i n s e c u r i t i e s o n i t s o w n a c c o u n t o r o n b e h a l f o f i t s custo
mers.(d)Opening letters of credits.(e)Issuing guarantees.(f) Dealing in foreign exchange.
(g)
Transferring money from one place to another through demanddraft, telegraphic transfers,
travelers cheques, bills, etc.
(h)
Merchant banking, i.e. acting as managers to public issues, etc

However, any company which is engaged in the manufacturer of goods or carries on any trade and
which accepts deposits of money from the publicmerely for the purpose of financing its
business as manufacturer or
trader s h a l l n o t b e d e e m e d t o t r a n s a c t t h e b u s i n e s s o f b a n k i n g . I t m a
y b e mentioned that the Banking Regulation Act, 1949 is not applicable to a primary
agricultural society, a co-operative land mortgage bank and anyother co-operative society except in
the manner and to the extent specifiedin Part V of the Act.Some banks are included in the Second
Schedule to the Reserve Bank of India Act, 1934; these are called Scheduled Banks. The
Reserve Bank includes a bank in this schedule if it fulfils certain conditions. The ReserveBanks gives
certain facilities to schedule banks including the following:(a) The purchase, sale, and re-discounting
of certain bills of exchange, or promissory notes;(b) Purchase and sale of foreign exchange;(c) Purchase,
sale and re-discounting of foreign bills of exchange;(d) Making of loans and advances to scheduled
banks;( e ) M a i n t e n a n c e o f a c c o u n t s o f t h e s c h e d u l e d b a n k i n i t s b a n k i n
g department and issue department;(f) Remittance of money between different branches of
scheduled banksthrough the offices, branches or agencies of Reserve Bank free of cost or at
nominal rates.Section 6 of the Banking Regulation Act, 1949 specifies the forms
of business in which a banking company may engage. These are :(i) borrowing, raising or taking
up of money; lending or advancing
of m o n e y ; d r a w i n g , m a k i n g , a c c e p t i n g , d i s c o u n t i n g , b u y i n g , s e l l i n g ,
collecting and dealing in bills of exchange, hundies, promissory notes,etc.;(ii) acting
as agents for any government or local authority or any other person;(iii) directing for
public and private loans and negotiating and issuing
thesame;(iv) effecting, insuring, guaranteeing, under-
writing, participating inmanaging and carrying out of any issue of shares, stock, debentures etc.;(v)
carrying on and transacting every kind of guarantee and indemnity business;(vi)
managing, selling and realising property which may come into the possession of the
banking company in satisfaction of its claim;
(vii) acquiring and holding and generally dealing with any property or anyright, title or interest in such property which
may form the security for anyloans and advances;(viii) underwriting and executing trusts;(ix) establishing and
supporting or aiding in the establishment and supportof institutions, funds, trusts etc.(x) acquisition, construction,
maintenance and alteration of any buildingand works necessary for the purpose of the banking
company;( x i ) s e l l i n g , i m p r o v i n g , m a n a g i n g , d e v e l o p i n g , e x c h a n g i n g , l e a s i n g , mortga
ging, depositing of or turning into account or otherwise dealingwith all or any part of the property
and rights of the company;(xii) acquiring and undertaking whole or any part of the business of any person or
company;(xiii) doing all such other things as are incidental or conductive to the promotion or
advancement of the business of the banking company;(xiv) any other business which the Central
Government may specify bynotification in the Official Gazette. No banking company shall engage
in any form of business other thanthose referred to above.

PROHIBITION OF TRADING (SECTION 8)

A banking company cannot directly or indirectly deal in the buying or s e l l i n g o r
b a r t e r i n g o f g o o d s . H o w e v e r , i t m a y b u y, s e l l o r b a r t e r
inc o n n e c t i o n w i t h t h e b i l l s o f e x c h a n g e r e c e i v e d f o r c o l l e c t i o n o r
negotiation or can undertake the administration of estates as executors,trustees or otherwise.

DISPOSAL OF NON-BANKING ASSETS (SECTION 9)

A banking company can only acquire immovable property for its own use.Other immovable properties acquired
must be disposed off within sevenyears from the date of acquisition. However, in any
particular case, theR e s e r v e B a n k o f I n d i a m a y e x t e n d s u c h p e r i o d o f s e v e n ye a r s i f
i t i s satisfied, that such extension would be in the interest of the depositors of the banking company.

MANAGEMENT (SECTION 10)

Under section 10(a), not less than 51% of the total number of members of t h e b o a r d o f d i r e c t o r s
o f a b a n k i n g c o m p a n y s h a l l c o n s i s t o f p e r s o n s having special knowledge or practical
experience in one or more of thefollowing fields :1. Accountancy;2. Agriculture and rural economy;
3. Banking;4. Co-operation;5. Economics;6. Finance;7. Law;8. Small scale industry.It is also required that not
less than two directors should have
specialk n o w l e d g e o r p r a c t i c a l e x p e r i e n c e i n r e s p e c t o f a g r i c u l t u r e a n d r u r a l econo
my and co-operation or small-scale industry. Under section 10(
b
)(1), every banking company shall have one of its directors as Chairman of its board of directors. The
Chairman is entrusted with the management of the whole of the affairs of the banking company.
Such Chairman is thewhole-time employee of the banking company and can hold office for
a p e r i o d n o t e x c e e d i n g f i v e ye a r s . O t h e r d i r e c t o r s w h o a r e w h o l e - t i m e directors
can hold office continuously for a period not exceeding eight years