Banking Law

Unit-III Law of Banking Regulations: Banking Regulation Act

Topic:

1. Aims and Objectives

2. Banking Services

Synopsis
I. Introduction
II. History
III. Significance of the Act
IV. Applicability of the Act
V. Main Provisions of the Act
VI. The Aims & Objectives of Banking Regulation Act, 1949
VII. Some Definitions under the Act
VIII. Banking Services
I. Introduction

Immediately after independence, the Government of India had taken two important steps.
Firstly, it has taken the step of nationalization of RBI to give extensive regulatory powers to
Reserve Bank of India over the commercial banks and secondly it enacted the Banking
Regulation Act in 1949. The Banking Regulation Act is an important phase in the
development of banking in India. The Act brought out substantial changes, structurally,
geographically and functionally in the Indian Banking System. It is a landmark step in the
History of Banking in India.

II History

In order to consolidate and amend the law relating to banking companies the Banking
Companies Act, 1949 (10 of 1949) was passed. There were several reasons for passing this
Act such as the abuse of powers by persons controlling some banks, the absence of measures
for safeguarding the interests of depositors of banking companies as well as to safeguard the
economic interests of the country. With effect from 1-3-1966 the name of the Banking
Companies Act, 1949 (10 of 1949) has been changed to the banking Regulation Act, 1949.
By an amendment Act called the Banking Laws (Application to Co-operative Societies) Act,
1965 w.e.f. 1-3-1966, the Banking Companies Act, 1949 was renamed as the Banking
Regulation Act, 1949. It was also laid down that any reference to the Banking Companies Act
in any law or in any instrument or other documents shall be construed as a reference to the
Banking Regulation Act, 1949. The amending Act made the Banking Regulation Act, 1949
applicable to Co-operative Banks with modifications.

III Significance of the Act

The Act, as amended up-to-date, is a comprehensive piece of legislation aimed at the

development of sound and balanced growth of banking business in the country. Right from
the definition of the word banking, its licensing, functioning, capital and reserve
requirements, banking operations and management structure, liquidity provisions and profit
distribution and bank inspection down to the take-overs and amalgamation of the banks and
their liquidation have all been extensively covered under the Act.

IV. Applicability of the Act

The Act is applicable to

1. Nationalised Banks
2. Non-nationalised Banks &
3. Any other Co-operative Society in the manner and to the extent specified in Part V
of the Act.

In G. Gopinathan Nair v. State of Kerala, AIR 1977 Ker 36 the following was laid down:

“As provided in Part V of the Banking Regulation Act, 1949 this Act is applicable to the co-
operative societies. However, this Act is not applicable where the institutions are classified
according to their financial status or according to their staff structure or according to the
conditions of work.”

With regard to applicability of this Act it is provided under Section 3 of the Banking
Regulation Act, 1949 that nothing in this Act shall apply to—
(a) a primary agricultural credit society;
(b) a co-operative land mortgage bank; and
(c) any other co-operative society, except in the manner and to the extent specified in Part
V. Main Provisions of the Act

The following points highlight the principle eleven provisions of Banking Regulation Act,
1949. They are: (1) Prohibition of Trading (2) Non-Banking Assets (3) Management (4)
Minimum Capital and Reserves (5) Capital Structure (6) Payment of Commission, Brokerage
etc. (7) Reserve Fund/Statutory Reserve (8) Cash Reserve (9) Liquidity Norms (10)
Restrictions on Loans and Advances and (11) Accounts and Audit 

VI. The Aims & objectives of Banking Regulation Act, 1949

The Banking Regulation Act 1949 enacted in February 1949 with the following objectives:

1. The provisions of the Indian Companies Act 1913 was found

i n a d e q u a t e a n d unsatisfactory to regulate banking companies in India.
Therefore, a need was felt to have a specific legislation having comprehensive
coverage on banking business in India.
2. Due to inadequacy of capital, many banks failed and hence prescribing
a minimum capital requirement was felt necessary. The Banking
Regulation Act brought in certain minimum capital requirements for banks.
3. Ensuring the balanced development of banking companies.
4. One of the key objectives of this act was to avoid cut throat competition among
banking companies.
5. Regulating the opening of branches and changing location of existing
branches.
6. Ensuring balanced development of banking companies and to prevent
indiscriminate opening of new branches by system of licensing.
7. Giving powers to RBI to approve the appointment, reappointment, and removal
of the chairman, directors, and officers of the banks.
8. Safeguarding the Interests of Depositors and public by incorporating
certain provisions.
9. Facilitating strengthening the banking system of the country by incorporating
many provisions in this regard..
10. Providing compulsory amalgamation of weaker banks with senior
banks, and thereby strengthens the banking system in India.
VII. Some Definitions under the Act

Section 5 of the Act defines many terms used in the Act. Here, we are going to discuss three
important terms viz. banking, banking company and company.
According to section 5(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 otherwise. In Rustom Cavasjee Cooper v. Union of
India, AIR 1970 SC 564 the Supreme Court held that “Banking” does not include other
commercial activities of the banking institution.
According to section 5(c) “banking company” means any company which transacts the
business of banking  in India. Explanation.—Any company which is engaged in the
manufacture of goods or carries on any trade and which accepts deposits of money from the
public merely for the purpose of financing its business as such manufacturer or trader shall
not be deemed to transact the business of banking within the meaning of this clause.
In Mahalaxmi Bank Ltd. v. Registrar of Companies, West Bengal, AIR 1961 Cal 666 it was
laid down that the essential characteristic of banking is the ability to receive money by way of
deposit from the customers and also to honour the customers’ cheque. If there is an inability
to do so, then the mere fact that the company has a power to grant loans will not make it a
‘banking company.
In Kalipada Sinha v. Mahaluxmi Bank Ltd., AIR 1961 Cal 188 it was observed that a
“banking company” means a company which carries on the business of banking, no matter, if
the same is not carried on for some time.
In K.V.S. Vassan Bros. v. The Official Liquidator, The B.B. Corp. I. Ltd., AIR 1952 Trav 170
the following was observed “Until the court orders for the liquidation of a banking company,
it continues to exist in its original form, even though the proceedings for its liquidation are
started under section 194 of the Companies Act.”

The term “company” under Section 5(d) means any company as defined in section 3 of the
Companies Act, 1956 and includes a foreign company within the meaning of section 591 of
that Act.

VIII. Banking Services

The Banks are main participants of financial system of a country. The services provided by
the Banks are regarded as one of the important service to the public. Banks provide several
financial services to the customers to cater their financial needs. Due to the rising competition
and liberalization, the banking industry has become the buyer’s market. Banks need to create
and develop the services which can satisfy the consumer needs along with comprehensive
economic growth of the country.
The Services rendered by the banks in our country can be classified into two categories:
a. Traditional Services
b. New Services

a. Traditional Services
Traditional Services mainly cover the following aspects:
i. maintenance of different types of deposit accounts, e.g. savings, fixed and current
deposits accounts;
ii. grant of advances through cash credit, overdraft and loan accounts and through
purchasing/discounting demand and usance bills;
iii. collection of cheques, bills of exchange and other instruments;
iv. issue of performance and financial guarantees;
v. provision of remittance facilities by issue of drafts, mail transfers and telegraphic
transfers;
vi. provision of facilities of safe deposit and safe custody;
vii. purchase and sale of securities and
viii. foreign currency exchange with local currency in an easy manner.

b. New Services
The banks have introduced a number of new services with an emphasis on deposit
mobilisation and grant of credit to weaker sections of the society in recent years. In the
modern world, banks offer a variety of services to attract customers. These can be
summarised as following:
i. Credit and debit cards: Most banks offer credit cards to their customers which can
be used to purchase products and services, or borrow money.
ii. Online Banking: In the digital world, every bank is striving to make space in online
banking world. With the help of the internet, banks allow their customers to perform
banking activities through their official website. This allows the customer to access
their account 24/7 without having to visit a physical branch.
iii. Mobile Banking: Banks are also providing mobile banking services wherein
customers can perform banking activities through their smartphone apps. Mobile
 banking (also known as M-Banking) is a term used for performing balance checks,
account transactions, payments, credit applications and other banking transactions
through a mobile device such as a mobile phone or Personal Digital Assistant (PDA).
iv. Home Banking: Home banking is another rising trend wherein banking transaction
can be made from home directly. These services require an internet connection or
access to online banking.
v. Investment Banking: Many banks now offer financial services to their customers.
They help customers make the best of their wealth by offering several investment
products.
vi. Consultancy: Modern banks have a holistic approach and they aim to provide all
kinds of services to their customers that involve their financial situation. Modern
banks are hiring financial and legal experts to provide advice and solutions about
customers wealth, investment, and trading.
vii. Wealth Management: Wealth management is one of the many investment services
offered by banks. It allows the customers to plan their finances to grow long-term
wealth.
viii. Bank Guarantee: Customers are provided the facility of bank guarantee by modern
commercial banks. When customers have to deposit certain fund in governmental
offices or courts for a specific purpose, a bank can present itself as the guarantee for
the customer, instead of depositing fund by customers.
In addition to the above stated services banks also offer several other services to the
customers such as solvency certificates, mutual funds, insurance services, gold coins etc. At
present, we have a fairly well-organized and structured banking system in India providing
new-generation banking services. There has been a continuous growth in the banking
industry of India in view of the global requirements, the present aspirations and expectations
of the public.

For Reference:

Videos:

 https://www.youtube.com/watch?v=5-acwfsYTAw
 https://www.youtube.com/watch?v=L2Kic_3c6ls
 https://www.youtube.com/watch?v=mhEa_c3YUVk
PPTs

 https://www.slideshare.net/KajalBansal/banking-regulation-act-1949-70521705

(Banking Services)

 http://www.authorstream.com/Presentation/hrishikeshkrojha-1262584-banking-
services/
 https://www.slideshare.net/NarayanGaonkar1/banking-services-43012852