CENTRAL UNIVERSITY OF SOUTH

BIHAR

School of Law & governance

Subject – Banking Law
Topic – History, Salient Features and Social Control of
Banking Regulation Act, 1949
Submitted to:
Dr. Ajay Kr. Barnwal
Submitted By:
Anuj Kamal
B.A. LL.B (H)
7th Semester
CUSB1613125008
 ACKNOWLEDGEMENT
I owe a sincere thanks to many people who helped me and guided me in writing
of this project. My deepest thanks to my course instructor Dr. Ajay Kumar
Barnwal Sir for guiding and helping me at every stage during the completion of
this project with sincere attention and care.

Again, I would like to thank all mighty and my friends for supporting me in
whole process of this project completion. At last, my deep sense of gratitude
also goes to my friends, institution and every single person who are related with
this project in any way and without whom this project would have been a distant
reality.

-Anuj Kamal
Contents
Introduction ............................................................................................................................................. 4
History; The Banking Regulation Act, 1949. ......................................................................................... 5
History of Banking in India: ............................................................................................................... 5
Features of Banking Regulation Act, 1949 ............................................................................................. 6
Social Control ......................................................................................................................................... 7
Conclusion .............................................................................................................................................. 8
Bibliography ........................................................................................................................................... 9
Introduction

Banking Regulation Act, 1949 as the name itself defines, is a legislature which regulates all
the banking firms in India. The Act provides a framework under which commercial banking
in India is supervised and regulated. The Act was initially passed as Banking Companies Act,
1949. The Act supplements the Companies Act, 1956. Primary Agricultural Credit Society
and cooperative land mortgage banks are excluded from the Act.

The Act was made to be applicable in Jammu & Kashmir from the year 1956. In 1965 it was
amended to make it applicable to cooperative banks and to introduce some other changes
which enhanced its applicability from Banking Company, to regulate the cooperative banks.
Finally the name was changed to Banking Regulation Act 1949 from the date of 1st March
1966.

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.1

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.2

The Act was enacted when the Indian the provisions of Companies Act, 1913 seemed to be
inadequate to regulate banking firms, with a object to cut off the competition among banks
and promote the regulated opening of branches and it also changed the location of existing
branches.

The Banking Regulation Act, 1949 also imposes its regulations to maintain adequacy of
capital among banks for securing higher chances of success.

1
Banking Regulation Act, 1949; Available at - https://en.wikipedia.org (Last Visited on- 06th December, 2019)
2
Ibid
History; The Banking Regulation Act, 1949.

The Act was originated in the year 1949 on the date of 16th March, with a name of Banking
Companies Act, 1949. It went through numbers of amendment to spread and enhance its
applicability, as at the very beginning in the year 1956 the Act got its applicability in the
territory of Jammu & Kashmir. In 1965 it went through an amendment to include and
regulate cooperative banks under its ambits. 01st March, 1966 an amendment took place
which changed the term „Companies‟ to „Regulation‟ and the Act took its shape as “Banking
Regulation Act, 1949”.

The need of this statute was realised earlier from 1949 as many banks were facing failures in
their business and the provisions of Indian Companies Act, 1913 seem inadequate to regulate
banking firms.

History of Banking in India:

Banking In India in the modern sense originated in the last decades of the 18th century. The
first banks were Bank of Hindustan 17701829 and The General Bank of India, established
1786 and since defunct.3
The largest bank, and the oldest still in existence, is the State Bank of India, which originated
in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal.
This was one of the three presidency banks, the other two being the Bank of Bombay and the
Bank of Madras, all three of which were established under charters from the British East
India Company. The three banks merged in 1921 to form the Imperial Bank of India, which,
upon India's independence, became the State Bank of India in 1955. For many years the
presidency banks act as quasi-central banks, as did their successors, until the Reserve Bank of
India was established in 1935.4

In 1969 the Indian government nationalized all the major banks that it did not already own
and these have remained under government ownership. They are run under a structure know
as 'profit-making public sector undertaking' (PSU) and are allowed to compete and operate as
commercial banks. The Indian banking sector is made up of four types of banks, as well as
the PSUS and the state banks: they have been joined since 1990s by new private commercial
banks and a number of foreign banks.5

Banking in India was generally fairly mature in terms of supply, product range and reach-
even though reach in rural India and to the poor still remains a challenge. The government
has developed initiatives to address this through the State bank of India expanding its branch
network and through the National Bank for Agriculture and Rural Development with things
like microfinance.6

3
Project- Banking Regulation Act, 1969 from University of Mumbai; Available at- https://www.slideshare.net
(Last visited on- 06th December, 2019)
4
Ibid
5
Ibid
6
Ibid
 Features of Banking Regulation Act, 1949

 Prohibition of trading; under Section 8: According to Section 8 of the Banking Regulation

Act, a bank cannot directly or indirectly deal with buying or selling or bartering of goods.
However it may barter the transactions relating to bills of exchange received for collection or
negotiation.
 Non-banking asset; under Section 9: A bank cannot hold any immovable property, howsoever
acquired, except for its own use, for any period exceeding seven years from the date of
acquisition thereof. The company is permitted, within a period of seven years, to deal or trade
in any such property for facilitating its disposal.
 Management; under Section 10: This rule states that every bank shall have one of its directors
as Chairman on its Board of Directors. It also states that not less than 51% of the total
number of members of the Board of Directors of a bank shall consist of persons who have
special knowledge or practical experience in accountancy, agriculture, banking, economics,
finance, law and co-operatives.
 Minimum capital; under Section 11: Section 11 (2) of the Banking Regulation Act, 1949,
states that no bank shall commence or carry on business in India, unless it has minimum paid-
up capital and cash reserve prescribed by the RBI.
 Payment of commission; under Section 13: According to Section 13, a bank is not permitted
to pay directly or indirectly by way of commission, brokerage, discount or remuneration on
issues of its shares in excess of 2.5% of the paid-up value of such shares.
 Payment of dividend; under Section 15: According to Section 15, no bank shall pay any
dividend on its shares until all its capital expenses (including preliminary expenses,
organisation expenses, share selling commission, brokerage, amount of losses incurred and
other items of expenditure not represented by tangible assets) have been completely written-
off.7
These are the major salient features of Banking Regulation Act, 1949

7
Banking Regulation Act; Available at- https://indianmoney.com (Last visited on- 06th December, 2019)
Social Control

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
channelize 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 indus-tries
and exports were neglected.

The chairmen and directors of banks were mostly indus-trialists and many of them were
interested in sanctioning large amount of loans and ad-vances 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 knowl-edge 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.8

8
Social Control Over Banks; Available at- http://www.preservearticles.com (Last visited on- 06th December, 2019)
Conclusion

Banking Regulation Act, 1949 was initially passed with a name Banking Companies Act,
1949 on the date of 16th March. This Act was primarily supposed to regulate banking firms,
then after it went through numbers of amendment, in year 1965 it expanded its applicability
over cooperative banks also. Banking Regulation Act was first legislature to succeed in
making the functioning of Banking smooth, it first imposed its regulations to prescribe to
maintain a Minimum Capital and focused upon regulated opening of new branches together
with changing the location of existing branches. In terms of Social Control it has made
Banking System much Secure and the provisions itself directs RBI to first be satisfied of the
elements of bank then only the recognition shall be given, and the concept of Nationalisation
of banks went more effective as in today‟s scenario many banks are nationalised and are
providing services in semi- rural and rural areas of the country.
Bibliography

https://en.wikipedia.org
https://www.slideshare.net
https://indianmoney.com
http://www.preservearticles.com