Overview of Banking Regulation Act,1949.

Introduction:

The Banking regulation act 1949, extends to the every part of the nation. The Banking companies
Act 1949, came into force with effect from16 march 1949 and was later changed to Banking
Regulation Act 1949 with effect from 01.03.1966, and since year 1956, it was applicable to Jammu
and Kashmir.

The act regulates the manner banks are to be run, the kind of business they should do, how they
should be managed and the kind of business they may not do.

This act is not applicable to a primary agricultural credit society, a co-operate land mortgage bank
and any other co-operative society, except in the manner and to the extent specified in part V.

Banking:

According to Section 5 of the act ,”banking” means the accepting for the purpose of lending or
investment, of deposits of money from the public, repayable on demand or otherwise , and
withdrawal by cheque , draft, order or otherwise.

Banking company:

Any company which transacts the business of banking.

Objectives of Banking Regulation Act, 1949.

The objective of Banking Regulation act, 1949 is to

 Furnish specific legislation containing comprehensive provisions, specifically to the business

of banking in India .
 Avert such Bank failures by prescribing minimum capital requirements.
 Ensure the balanced development of banking companies.
 Safeguard the interests of depositors.
 Facilitate strengthening the banking system of the country.
 Give powers to RBI to approve the appointment , and removal of the chairman, directors,
and officers of the bank.

Powers and functions of the RBI:1

1
Powers of RBI defined under Banking Regulation act, 1949.
1. To appoint chairman of the board of directors appointed on a whole time basis or a
managing director of a company.
2. To control advance by banking companies.
3. To license banking companies.
4. To publish information.
5. To give directions.
6. To issue directions in respect of stressed asset.
7. May caution or prohibit banking companies against entering into any particular
transaction.
8. Give assistance to any banking companies.
9. Shall make an annual report to the central government on the trend and the
strengthening of banking business throughout the country.
10. May appoint staff for scrutiny of the returns , statements and information furnished
by banking companies under this Act.
11. To remove managerial and other persons from office.
12. To appoint additional directors.
13. To apply to central government for suspension of business by a banking company
and to prepare scheme of reconstitution of amalgamation.

Power to issue the RBI Circular:

The Court noticed that the sources of power for issuance of the aforesaid circular have been
stated to be Section 35A of the Banking Regulation Act read with the Central Government’s
circular dated 05.05.2017, Sections 35AA and 35AB of the said Act, and Section 45L of the
Reserve Bank of India Act, 1934.

Section 35A of the Banking Regulation Act,

“When resolution through the Code is to be effected, the specific power granted by Section
35AA can alone be availed by the RBI. When resolution de hors the Code is to be effected,
the general powers under Sections 35A and 35AB are to be used. Any other interpretation
would make Section 35AA otiose.”
Explaining that ‘default’ would mean non- payment of a debt when it has become due and
payable and is not paid by the corporate debtor, the Court said that what is important to note
is that it is a particular default of a particular debtor that is the subject matter of Section
35AA.

“It must also be observed that the expression “issue directions to banking companies
generally or to any banking company in particular” occurring in Section 35A is conspicuous
by its absence in Section 35AA. This is another good reason as to why Section 35AA refers
only to specific cases of default and not to the issuance of directions to banking companies
generally, as has been done by the impugned circular.”

Section 45L of RBI Act,

The Court noticed that the impugned RBI circular nowhere said that the RBI has had due
regard to the conditions in which and the objects for which such institutions have been
established, their statutory responsibilities, and the effect the business of such financial
institutions is likely to have on trends in the money and capital markets.

“There is nothing to show that the provisions of Section 45L(3) have been satisfied in issuing
the impugned circular.”

Severing Non-Banking institutions from Banking Institutions

The impugned RBI circular applied to banking and non-banking institutions alike, as banking
and non-banking institutions are often in a joint lenders’ forum which jointly lend sums of
money to debtors. Such non-banking financial institutions are, therefore, inseparable from
banking institutions insofar as the application of the impugned circular is concerned.

“It is very difficult to segregate the non-banking financial institutions from banks so as to
make the circular applicable to them even if it is ultra vires insofar as banks are concerned.”

Penalties:

Penalties provided under Section 46 of the Banking Regulation Act, 1949,

 A person who willfully misrepresents facts or omits material facts in the balance sheet
or while filing any return or while furnishing any other document, or presents such
facts which is known to be false by the concerned person, is liable for imprisonment
of up to three years along with fine.

 If a person fails to furnish documents, books, accounts or any statement which he is

liable to produce under Section 35 or if he fails to answer any question which he was
asked to by any inspection officer, he shall be punished with fine extending up to Rs.
2000 per offence and if he refuses to follow the procedure fine may extend to Rs. 100
per day during which the offence continues.

 If a banking company receives any deposit which is in contravention of any order

under Section 35(4)(a), all officers and directors will be deemed guilty and shall be
punishable with a fine which may extend to twice the amount of the deposits so
received unless the person proves that he was unaware of the contravention or that he
 exercised all due diligence to prevent the occurrence of the contravention. Further, a
person will be punishable with fine which may extend to Rs. 50,000 or double the
amount of default or contravention along with an additional charge of Rs. 2500 per
day will continue until the contravention or default ends, if

o the person does not comply with the orders, direction or any rule made or
imposed

o any default has been made in carrying out the terms or obligations given under
Section 45(7).

 Where a company has defaulted any terms or order, every person employed by the
company or responsible to the company or was in charge of the company at the time
of occurrence of the contravention shall be punished.

 Notwithstanding anything mentioned under sub-section 5 of Section 46, where a

company has committed a default or contravention and if it is proved that the default
took place with the consent of or due to any gross negligence on part of any director,
secretary or another officer, such officers or directors shall be punishable.

Conclusion:

The Banking Regulation Act has been able to ensure efficacious supervision of banking in our
country .RBI has a control over the licensing and regulation of the business operations. This act is a
companion to other banking related acts.

Reference:

 https://rbidocs.rbi.org.in › PDFsPD
 https://www.nabard.org › authPDF
 https://www.nabard.org › authPDF
 https://indianmoney.com › articles