SUMMARY

CHAPTER-3
BANKING REGULATION ACT, 1949

The Banking Regulation Act enacted in 1949 provides a framework for the
regulation and supervision of commercial banking activity. The provisions
of the Companies Act apply to only the banks in the privat4e sector. The act
regulates the manner banks are to be run, the kind of business they should
do, how they should be managed, the kind of business they mey6 not do and
the likes.

Definition of Banking

section 5(b) as accepting, for the purpose of lending,

investment, of deposits of money from public, repayable on demand or Comment: These deposits are different
from those accepted by a non banking
finance company.

Works Banks May Engage In

Section 6 of Banking Regulations Act, 1949 elaborately specifies the

other forms of businesses which a banking company may carry on in
addition to banking as defined in section 5. These include:
Issuing Demand Drafts and travelers cheque
Collection of cheques, bill of exchange
Discounting and purchase of bills
Hiring out of safe deposit lockers
Issuing letters of credit and guarantees
Sales and Purchase of foreign exchange
Offering custodial services
Offering investment services
Doing all such other things as are incidental or conducive to the
promotion or advancement of the business of the company
The activities which is lawful for a business company to engage
Undertaking and executing trusts
Administration of estates as executor, trustee or otherwise;
Carrying on and transacting every kind of guarantee and indemnity
business
Acting as a gent to government or local authority

1
 Acquisition, construction, maintenance alteration of any building or
works necessary for the purpose of the company
No firm, individual or group of individuals shall for the purpose of carrying
on any business,

Prohibition of Trading- section 8

No banking company shall directly or indirectly deal in the buying or selling

or bartering goods, except in connection with the realization of security Comment: Every kind of movable
property, other than actionable claims,
given to or held by it, or engage in any trade, or buy, sell or barter goods for stocks, shares, money, bullion and specie
and all instrument
others otherwise than in connection with bills of exchange received for
collector or negotiation or with such of its business.

Disposal of Non-Banking Assets-section 9

acquired, except such as is required for its own use, for any period exceeding

extended period as the case may be.

Prohibition of Employment of Managing Agents and Restrictions on

certain forms of employment Section 10

No managing agent for banking

No employment for adjudicated insolvent, convicted by a criminal
court of an offence involving moral turpitude or whose enumeration
or part of whose remuneration takes the form of commission or of a
share in profits of the company or whose remuneration is excessive in
the opinion of RBI.

Management

Not less than 51% of the total number of members of the Board of Directors
of a banking company shall consist of persons, who:
a. shall have special knowledge or practical experience in one or more
matters like accountancy, agriculture and rural economy, banking, co-
operation, economics, finance, law, small scale industry or any other
useful banking knowledge

2
 b. Shall not have substantial interest in, or be connected with, whether as
employee, mangers or managing agent in any company, not being a
company registered. The chairman of the board of directors shall not Comment: Section 25 of the
Companies Act, 1956
be required to hold qualification shares in the banking company.

Tenure of office of Chairman/ Whole-time-Directors

i. The chairman or whole-time director shall hold office continuously

for a period exceeding eight years
ii. As per RBI if the composition of the board of directors of a
banking company is such that it does not fulfill the requirement it
may appoint a suitable person as a member of the board of
directors in the place of person removed and the person so-
appointed shall be deemed to have been duly elected by the
banking company as director.
iii. No act of proceeding of the board of a banking company shall be
invalid by reason only of any defect in the composition thereof or
on the ground that it is subsequently discovered that any of its
members did not fulfill the requirements of this section

Appointment of chairman/Managing Directors and their

Functions/Powers

i. As per banking company Act 1994, or which comes thereafter shall,

have one of its directors, who may be appointed on a whole-time
or a part time basis as chairman of its board of directors. His
function-management of the whole of the affairs of the banking
company.
ii. The chairman shall exercise his powers subject to the
superintendence, control and direction of the board of directors.
iii. Appointment of a part-time chairman will be subject to such
conditions as per RBI approval.
iv. The whole time chairman and the board of directors shall hold office
for five years, but may be reelected or reappointed.
v. Nothing in this sub-section shall be construed as prohibiting a
chairman from being a director of a subsidiary of the banking
company or a director of registered company

Powers of RBI for Removal of the Chairman/Managing Director

3
 i. The RBI may, by order, remove the Chairman or Managing Director
of a banking company and appoint a suitable person in his place.
ii. The RBI may, permit the chairman to undertake such part-time
honorary work
iii. The banking company, may with the approval of the RBI, make
suitable arrangements for carrying out the duties of chairman or
managing director for a total period not exceeding four months.

Prohibition of charge on unpaid capital

No banking company shall create a floating charge on the undertaking or
any property of the company or any part thereof, unless the creation of such
floating charge is certified in writing by the RBI.

Restrictions as to payment of dividend

No banking company shall pay any dividend on its shares until all its
capitalized expenses have been completely written off.

Reserve Fund
Every banking company shall create a reserve fund and shall, out of the
balance of profit of each year as disclosed in the profit and loss account
prepared under section 29 and before dividend is declared, transfer to the
reserve fund a sum equivalent to not less than twenty per cent of such profit

Cash Reserve
Every banking company shall maintain in India by way of cash reserve with
itself or by way of balance in a current account with the Reserve Bank, a
sum equivalent to a percentage of its demand and time liabilities in India as
on the last Friday of the second preceding fortnight and shall submit to the
Reserve Bank before the twentieth day of every month a return showing the
amount so held on alternative Fridays during a month with particulars of its
demand and time liabilities. The percentage to be held would be decided by
the Reserve Bank

Power of Reserve Bank to control advances by banking companies

It may determine the policy in relation to advances to be followed by
banking companies generally or by any banking companies in particular, and
when the policy has been so determined, all banking companies or the
banking company concerned shall be bound to follow the policy as so
determined. The Reserve Bank may give directions to banking companies.

4
 Rates of interest charged by banking companies not to be subject
to scrutiny by courts: A transaction between a banking company and
its debtor shall not be re-opened by any court on the ground that the
rate of interest charged by the banking company in respect of such
transaction is excessive.

Licensing of Banking Companies

Licensing is a must for banking companies. Every banking company shall
apply in writing to the RBI for a license. Before granting any license, the
RBI may require to be satisfied by an inspection of the books of the
company. Before granting any license to a company incorporated outside
India, the RBI may require to be satisfied by an inspection that the
conditions specified are fulfilled and that the carrying on of banking
business by such company in India will be in the public interest and as per
the Government law of the country.
The RBI can cancel a license :
i. If the company ceases to carry on banking business in India
ii. If the company at any time fails to comply with any condition
imposed upon it under the Act
iii. If at any time, any of the conditions laid down by the Reserve Bank
are not fulfilled
Any banking company aggrieved by the decision of RBIs canceling the
license may within thirty days from the date on which the decision is
communicated to it, appeal; to the Central Government.

Power of Reserve Bank to give directions

It may, from time to time, issue such directions as it deems fit, and the
banking companies or the banking company, as they case may be, shall be
bound to comply with such directions. The RBI may on representation made
to it or on its own motion, modify or cancel any direction issued.

Inspection
The RBI at any time may cause an inspection of any banking company and
its books and accounts. It may also cause a scrutiny to be made by any one
or more of its officers, of the affairs of any banking company and its books
and accounts. The RBI shall report to the Central Government if necessary.
It may after giving such opportunity to the banking company to make a
representation in connection with the report as in the opinion of the Central
Government.

5
6