Professional Documents
Culture Documents
Introduction:
Indian Financial System and the economic developments are dependent on the important
segments like Banks and an efficient banking system in India. Various categories of stakeholders
of the Society use the banks for their different requirements. Banks function as the financial
intermediaries between the depositors and the borrowers. In today’s changed global business
environment the services like accepting the deposits, lending money, and many more value
added services are provided by the banks to their clients. The Reserve Bank of India as the
Central Bank of the country plays different roles like the regulator, supervisor and facilitator of
the Banking System in India.
Banking Business in India is mainly governed and controlled by the Reserve Bank of
India Act, 1934 and the Banking Regulation Act, 1949. There are other legal frame work like the
Companies Act,1956, the Negotiable Instruments Act,1881, the Indian Contract Act,1872, the
DRT Act,1993, the Law of Limitation, FEMA,1999, etc. which are supplementary to the RBI
Act,1934 and the BR Act,1949.
The Banking Regulation Act, 1949 contains various provisions’ governing the
Commercial Banks in India. The Act was initially known as Banking Companies Act, 1949. It
was passed in 1949 to consolidate and amend the laws relating to banking companies. The act
was changed to Banking Regulation Act, 1949 from 1st March, 1966. The need for the
consolidation was felt owing to the absence of measures to safeguard the interests of the
depositors and the abuse of powers by persons who controlled some of the banks. The Act is
regulatory, meant to regulate the functioning of the banking companies and corporations.
The Banking Regulation Act, 1949 has 56 Sections in total. Initially 55 Sections were there and
the 56th section was added to include the Cooperative Banks in the Amended Act of 1965.
Three years 1968, 1969, and 1980 witnessed the three major events:
Nationalized banks
Non-nationalized banks
Co-operative banks in the manner and to the extent specified in the Act.
S. 3 to apply to co-operative societies in certain cases.-
(c) any other co-operative society, except in the manner and to the extent specified in Part V.
Section 5A of the Banking Regulation Act, 1949 provides that the provisions of this Act shall
have effect notwithstanding anything to the contrary contained in:
It is further provided that any provision contained in the memorandum, articles, agreement or
resolution aforesaid shall, to the extent to which it is repugnant to the provisions of the Act,
become or be void.
(a) "Approved securities" means the securities issued by the Central Government or any
State Government or such other securities as may be specified by the Reserve Bank from
time to time;
(b) "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 other wise;
(c) "Banking Company" means any company which transacts the business of banking in
India;
(d) "Banking Policy" means any policy which is specified from time to time by the Reserve
Bank in the interest of the banking system or in the interest of monetary stability or sound
economic growth, having due regard to the interests of the depositors, the volume of
deposits and other resources of the bank and the need for equitable allocation and the
efficient use of these deposits and resources;
(e) "Company" means any company as defined in section 3 of the Companies Act,
1956 (1 of 1956); and includes a foreign company within the meaning of section 591 of that
Act;)
(f) "Demand Liabilities" means liabilities which must be met on demand, and "time
liabilities" means liabilities which are not demand liabilities;
(ii) Where the managing agent is a company, and Director of such company, and any
member thereof who holds substantial interest in such company;
(iii) Where the managing agent is a firm, any partner of such firm;]
PROVIDED that the Managing Director shall exercise his powers subject to the
superintendence, control and direction of the Board of Directors;
(h) "Secured Loan or Advance" means a loan or advance made on the security of
assets the market value of which is not at anytime less than the amount of such loan or
advance; and "unsecured loan or advance" means a loan or advance not so secured;
In relation to a firm, means the beneficial interest held therein by an individual or his
spouse or minor child, whether singly or taken together, which represents more than ten per
cent of the total capital subscribed by all the partners of the said firm;
It means such aggregate amount of the money credited as paid up as is equivalent to the
amount received as paid up in respect of the shares and also includes any amount credited as
paid up in respect of the shares of the company, nut does not include any other amount
received in respect of such shares by whatever name called.
It provides a list of activities which a banking company may engage in the business of
banking. The Main functions are as follows:
Acting as agents for any Government or local authority or any other person carrying the
agency’s business of any description but excluding of the managing agent or secretary
and treasurer of a company.
Managing the public loan and private loan and solving issues respectively.
The insuring, guaranteeing, underwriting, participating in managing and carrying out of
any issue public or private of the State municipal or other loans or of shares, stock,
debentures, stock of any company, corporation or association and the lending of money
for any purpose
May carry on activity for every kind of guarantee business.
Managing, selling and realizing any property which may come into the possession of the
company in satisfaction in any of its claims.
Can acquire, hold and deal with any property or any right, title or interest in any such
property which may form the security for any loan or advance which may be connected to
any of that security.
Undertaking and executing trusts.
Undertaking the administration of estates as executor, trustee.
Establishing and supporting of associations, institutions, funds, trusts and conveniences
calculated to benefit employees or ex-employees of the company.
The acquisition, construction, maintenance and alteration of any building or works
necessary for the purposes of the company.
Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of
or turning into account or otherwise dealing with the property and rights of the company.
Acquiring and undertaking the whole or part of the business of any person or a company,
when such business is of a nature enumerated or described in the act.
Doing all these things as are incidental or conducive to the advancement of the business
of the company.
Any other form of business which the Central Government fixed in the Official Gazette,
and specified as a form of business in which it is lawful for a banking company to
engage.
The above list of activities is exhaustive but not comprehensive. There are several kinds of
services listed above both under main business as well as ancillary business like some of the
agency services and general utility services
Agency Services
Carrying and transacting guarantee business on behalf of its clients, collection of bills,
securities etc. purchasing and selling of shares, bonds, debenture, etc. on behalf of
constituents negotiating of loans and advances, mail transfer etc. and many more agency
services are grouped as follows
Non-fund Business
Collection of instruments and securities on behalf of customers
Portfolio Management or Merchant Banking
Facility of remittance of funds
Money Exchange business as Authorized dealer under foreign exchange business
Other agency business on behalf of Government or local body
Factoring Services
Special Purpose Vehicle services for securitization of assets under securitization and
reconstruction of Financial assets and Enforcement of security interest act
Collection of taxes on behalf of the people
Collection of different dues of the people like telephone, electricity, municipal taxes
General Utility Services
Banking – Sec.5(b)
It 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.
Calcutta High Court observed that the essential characteristic of banking is the ability to receive
money by way of deposits from its customers and to honour their cheques. If a company is not
able to do this, then the mere fact that the company has power to give loans will not make it a
‘Banking Company’.
Supreme Court has clarified that ‘banking’ does not include other commercial activities of a
banking institutuion.
Sec. 7 provides that Individual, Firm or Group of Individuals and any Company other than a
Banking Company shall not use as part of its name or, in connection with its business, any of the
words ‘bank’, ‘banker’ or ‘banking’ and No company shall carry on the business of banking in
India unless it uses as part of its name at least one of such words.
Exceptions:
A Subsidiary of a Banking Company formed for one or more of the purposes mentioned in
Section 19(1), whose name indicates that it is a subsidiary of that banking company.
Any association of banks formed for the protection of their mutual interests and registered under
Section 8 of the Companies Act, 2013.
Section 8 provides that any banking company shall not directly or indirectly deal in the buying or
selling or bartering of goods, except in connection with the realization of security given to or
held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than:
Goods means every kind of moveable property, other than actionable claims, stock, shares,
money, bullion and specie and all instruments referred to in Section 6(1)(a).
Section 9 provides that a banking company can hold any immovable property only for the
following purposes:
Such extension may be granted where RBI is satisfied that such extension would be in the
interests of the depositors of the banking company.
They shall not have any substantial interest or connection with anyone of any company or firm.
It should have a Director as its whole time or part time chairman of the banking company.
Sec. 11 (2) of the Banking Regulation Act, 1949, provides that no banking company shall
commence or carry on business in India, unless it has minimum paid-up capital and reserve of
such aggregate value as is noted below:
(a) Foreign Banking Companies: In case of banking company incorporated outside India,
aggregate value of its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has
a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs. It must deposit and keep with
the R.B.I, either in Cash or in unencumbered approved securities:
(i) The amount as required above, and
(ii) After the expiry of each calendar year, an amount equal to 20% of its profits for the year in
respect of its Indian business.
(b) Indian Banking Companies: In case of an Indian banking company, the sum of its paid-up
capital and reserves shall not be less than the amount stated below:
(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of
business is in Mumbai or Kolkata or in both, Rs. 10 lakhs.
(ii) If it has all its places of business in one State, none of which is in Mumbai or Kolkata, Rs. 1
lakh in respect of its principal place of business plus Rs. 10,000 in respect of each of its other
places of business in the same district in which it has its principal place of business, plus Rs.
25,000 in respect of each place of business elsewhere in the State.
(iii) If it has all its places of business in one State, one or more of which are in Mumbai or
Kolkata, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai or
Kolkata? No such banking company shall be required to have paid-up capital and reserve
excluding Rs. 10 lakhs.
Sec. 12: Regulation of capital and voting rights of shareholders
No banking company can carry on business in India, unless it satisfies the following conditions:
(a) Its subscribed capital is not less than half of its authorized capital, and its paid-up capital is
not less than half of its subscribed capital.
(b) Its capital consists of ordinary shares only or ordinary or equity shares and such preference
shares as may have been issued prior to 1st April 1944.
(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all the
shareholders of the company.
Preliminary Expenses
Organization Expenses
Share Selling Commission
Brokerage
Amount of Losses Incurred, and
Any other item of expenditure not represented by tangible assets
Depreciation, if any, in the value of investments in approved securities, in any case where
such depreciation has not actually been capitalized or otherwise accounted for as a loss;
Depreciation, if any, in the value of its investment in shares, debentures or bonds (other
than approved securities) in any case where adequate provision for such depreciation has
been made to the satisfaction of the auditor of the banking company.
Bad debts, if any, in any case where adequate provision for such debts has been made to
the satisfaction of the auditor of the banking company.
It provides that a banking company incorporated in India shall not have any person as
director on its Board of Directors if such person is already a director in any other company. This
condition does not apply in relation to a director who is appointed by the RBI. It further provides
that any banking company incorporated in India shall not have in its Board of Directors are more
than three directors, which among themselves are entitled to exercise voting rights in excess of
20% of the total voting rights of all the shareholders of that banking company.
It provides that every banking company incorporated in India shall transfer, before
declaration of dividend, at least 20% of the profit, as per P&L A/c, to Reserve Fund. However,
CG may, on recommendation of RBI, having regard to the adequacy of the paid-up capital &
reserves of a banking company in relation to its deposit liabilities, declare by order in writing
that the provisions of sub-section (1) shall not apply to the banking company for such period as
may be specified in the order. Such an order can be passed only when the amount in the reserve
fund together with the share premium account is not less than the paid-up capital of the banking
company.
Where a banking company appropriates any amount from the reserve fund or share
premium account, it shall within 21 days from the date of such appropriation report the fact to
RBI, explaining the circumstances relating to such appropriation and RBI may, extend the period
of 21 days by such period as it thinks fit or condone any delay in the making of such report.
Section 18 provides that every banking company, not being a scheduled bank, shall maintain
in India by way of Cash Reserve
With itself, or
By way of balance in a current account with the Reserve Bank, or
By way of net balance in current accounts or in one or more of the aforesaid ways,
A sum equivalent to at least 4% of the total of its Demand & Time Liabilities in India
As on the Last Friday of the second preceding fortnight and
shall submit to the Reserve Bank before the 20th day of every month a return showing the
amount so held on
Alternate Fridays during a month
With particulars of its demand & time liabilities in India on such Friday, or if such Friday is a
public holiday under the Negotiable Instruments Act, 1881, at the close of business on the
preceding working day.
It provides that a banking company may form a subsidiary for carrying on any of the
following activities only:
The undertaking of any business which, under clauses (a) to (o) of Section 6, is
permissible for a banking company to undertake.
With the previous permission in writing of RBI, the carrying on of the business of
banking exclusively outside India.
The undertaking of such other business, which RBI may, with prior approval of CG,
consider to be conducive to the spread of banking in India or to be otherwise useful or
necessary in public interest.
The Banking Company cannot be considered to be engaged in the business activity which is
carried on by its subsidiary.
The Banking Company shall not hold shares in any company, whether as Pledgee,
Mortgagee, Absolute Owner of an amount exceeding 30% of Paid-up share capital of that
company, or its own paid-up share capital under reserves, whichever is less. This condition does
not apply in respect of shares of the subsidiary held by the banking company.
Except with the prior approval of RBI, a banking company shall not remit in whole or in part
any debt due to it by:
Any remission of debt in contravention of the aforesaid shall be void and of no effect.
Where RBI is satisfied that it is necessary or expedient in public interest or in the interest
of depositors to do so, it may determine the policy in relation to advances to be followed by
banking companies or any particular banking company, and such company shall be bound to
follow such policy.
A transaction between a banking company and its debtor shall not be reopened by any
court on the ground that the rate of interest charged by the banking company in respect of such
transaction is excessive. The provisions of this section have overriding effect over Usurious
Loans Act, 1918, or any other law relating to indebtedness in force in any State. Thus, court
cannot take any action against the bank.
No company shall carry on banking business in India unless it holds a license issued by the
Reserve Bank of India.
The Reserve Bank of India may grant a license upon fulfillment of the following conditions:
(i) That the company is or will be in a position to pay its present and future depositors in full as
their claims accrue;
(ii) That the affairs of the company are not being or are not likely to be conducted in a manner
detrimental to the interests of its present or future depositor;
(iii) That, in the case of a foreign banking company, the carrying on of a banking business by
such company in India will be in the public interest, that the Government or law of the country of
its origin does not discriminate against Indian banking companies carrying on business in that
country, and that it complies with all the requirements of law applicable to it”.
Cancellation of License:
Sec. 36AA: Power of RBI to Remove Managerial Persons from the Office
Whenever RBI is satisfied that it is necessary to do so, in the public interest, or for
preventing the affairs of a banking company
But if, in the opinion of RBI, any delay would be detrimental to the interests of the
company or its depositors, RBI may, at the time of giving opportunity aforesaid or at any time
thereafter, by order direct that, pending the consideration of the representation aforesaid, if any,
the Chairman, Director, CEO, Other Officer or Employee, shall not, with effect from the date of
such order Act as such Chairman/ Director/ CEO/ Other Officer or Employee, in any way,
whether directly or indirectly, be concerned with, or take part in the management of the banking
company.
Any person against whom an order of removal has been made under sub- section (1) may,
within thirty days from the date of communication to him of the order, prefer an appeal to the
Central Government. The decision of the Central Government on such appeal, and subject
thereto, the order made by the Reserve Bank under sub-section (I), shall be final and shall not be
called into question in any court.
• Fine of Rs. 250 for each day during which the contravention continues,
The New person so appointed shall hold office during the pleasure of RBI and subject
thereto for a period not exceeding 3 years or such further periods not exceeding 3 years at a time
as RBI may specify.
The person shall not incur any obligation or liability by reason only of his being a
Chairman/ Director/ CEO/ Other Officer or Employee, or for anything done or omitted to be
done in good faith in the execution of duties of his office or in relation thereto.
RBI can appoint one or more additional directors on Board of Directors of a banking company
whenever it forms an opinion that it is in the interest of:
Banking Policy, or
Public Interest, or
Banking Company, or
Depositors.
The additional directors so appointed shall hold office during the pleasure of RBI and subject
thereto for a period not exceeding 3 years or such further periods not exceeding 3 years at a time
as RBI may specify; and shall not incur any obligation or liability by reason only of his being a
Chairman/ Director/ CEO/ Other Officer or Employee, or for anything done or omitted to be
done in good faith in the execution of duties of his office or in relation thereto; and shall not be
required to hold qualification shares in the banking company. Such additional directors shall not
be considered for the purpose of reckoning any proportion of the total number of directors of the
banking company.
On the basis of report of RBI, if CG is satisfied that a banking company failed to comply its
directions more than one occasion, managed in a manner which is detrimental to the interest of
depositors. Then,
CG, in consultation with RBI, may acquire undertaking of such Co., including all its
assets & liabilities. Thereupon, all assets & liabilities of acquired bank shall stand
transferred to CG.
If CG is satisfied that undertaking including all assets & liabilities should vest in any
other Co., CG may make such order. Transferee bank shall be deemed as transferee of
acquired bank, and all assets & liabilities of acquired bank shall be deemed as of
transferee bank.
As to Reserve Fund – S. 17
As to Cash Reserve – S. 18
As to ‘Repo’ and ‘ Reserve Repo’ Rate
As to Loans and Advances – S. 20
As to Licensing of Banking Companies – S. 22
As to Opening of New Branch, transfer of existing place of Business, etc. – S. 23
As to Maintenance of Percentage of Assets – S. 24, 25
As to Monthly return, accounts and balance sheet – S.27, 28, 30,31
As to Inspection – S. 35
Power of RBI to give Direction – S.35A
Further powers and Functions of Reserve Bank – S. 36
Power of Control over Management
Supersession of Board of Directors of Banking Company
Acquisition of undertaking of Banking Companies – S.36AE
Power as to suspension and winding up of Banking Companies
As Agent of the Central Govt. or State Govt.
Power to advice banks.
Power to call for information.