Banking Regulation Act, 1949

This act was originally enacted as Banking Companies Act, 1949 on 16 March 1949. From 1st March, 1966, it was renamed as Banking Regulation Act, 1949. The act was initially enacted to regulate the banking companies. In 1965, it was amended and made applicable to cooperative banks also.

The act extends to entire nation including Jammu and Kashmir. The act gives following powers to Reserve Bank of India (RBI)

  • To supervise the appointment of boards and management of the banks
  • To lay down instructions for audits
  • To control mergers, liquidation and moratorium
  • To provide directives on banking policy
  • Impose penalty
  • To regulate operations of the bank
Not applicability

The act is not pertinent to the following banking institutions:

  • Primary Agricultural Credit Society
  • Non – agricultural primary credit societies
  • Cooperative land mortgage banks.

Banking Regulation Act: Important Sections

The following are the major sections / clauses of the Banking Regulation act, 1949

Section 5B

The section defines Banking. According to the act banking is defined as

  • Accepting deposits of money from public
  • Repaying money when demanded
  • Withdrawing by cheque, order, draft or otherwise

Banking company means the company that transacts banking business in India.

Section – 6 – Banking Company

According to Section 6 of Banking Regulation act, 1949, the following businesses are allowed for a banking company

  • Selling and managing properties that are under the possession of the bank
  • Lending and borrowing money with or without security
  • Buying and selling foreign currency, issuing traveler’s cheque
  • Buying bonds on behalf of the customers
  • Executing and undertaking trusts.
Section 8

This section explains about prohibition of trading imposed on the banking companies. A banking company cannot directly or indirectly contract to buy or sell or exchange goods.

Section 9

The section briefs about disposal of banking assets. Banking companies shall not hold property for more than 7 years in order to settle debts. The RBI can add 5 more years if it thinks it is appropriate.

Section 10

The section briefs about the power of RBI to appoint chairman of the banking company.

Section 17

The section explains about the reserve funds of a banking company. Every banking company should generate reserve funds out of the taxes and interest earned by it. Such reserve funds should be at least 20% of the profits gained. However, the RBI shall permit exemptions if the cumulative sum of reserve fund and security premium is greater than the paid-up capital of the banking institution.

Section 18

Every banking company should hold at least 3% of the total demand and time liabilities as cash reserve. These amounts should be deposited before twentieth day of every month.

Section 29

The section explains about accounts and balance sheet of the banking companies. The companies should submit a balance sheet and profit and loss account on the last working day in the end of the financial year. The balance sheet should be signed at least by 3 directors. In case of institutions incorporated outside India, the accounts must be signed by the principal officer.

Section 30

It empowers RBI to conduct auditing of banking companies. The balance sheet produced shall be audited by the person appointed by RBI. If RBI is not satisfied with the financial statements, it can put up special audits and the cost of such audits should be taken by the banking company itself.

Section 35

The section powers the RBI to conduct inspections on every banking company and its branches. It also empowers the RBI to issue directions to any banking institution in India or operating in India and based in foreign land. The Banking Regulation Amendment Act, 2017 had inserted two sub-sections viz. 35AA and 35AB in this section to give powers to RBI regarding insolvency resolution of loan defaulters.

Section 36

According to this section, RBI shall prohibit banks from entering into a particular transaction. It shall direct banks to call for a meeting of its directors. It shall appoint one or more officers to observe the way in which the affairs of the bank are conducted.

Section 56

In 1965, the Act was amended to include cooperative banks under its purview by adding the Section 56.

Important Amendments to Banking Regulation Act

1956 Amendment

In 1956, the act was amended the first time to make it applicable to Jammu & Kashmir.

1965 Amendment

In 1965, the act was amended to extend the powers of RBI to cooperative banks. Cooperative banks operate only in one state and are run by state government. The amendment, introduced as Section 56, gave powers to RBI to license and regulate the business operations in these banks. Recently on September 24, 2019 RBI used this clause to impose restrictions on PMC banks.

1994 Amendment

In 1994, the act was amended to introduce post of chairman of board of directors. According to the amendment, the chairman will be entrusted with the management of whole of the affairs of the banking company.

2004 Amendment

In 2004, the act was amended to give RBI powers to supersede the board of directors of cooperative banks and multi – state cooperative banks. According the amendment, RBI can constitute committees under an administrator to take over the function of the board of directors. The bill of the act was passed as an ordinance.

2007 Amendment

In 2007, the act was amended to make it compulsory for the scheduled banks to maintain cash reserve with RBI.

2017 Amendment

The latest amendment to the act is Banking Regulation (Amendment) Act, 2017

Banking Regulation (Amendment) Act, 2017

This amendment was introduced to insert provisions to handle stressed assets. The act replaced the Banking regulation (Amendment) ordinance, 2017.

Key features of the bill

In this amendment, following two subsections were added in section 35 of RBI Act:

  • 35AA. The Central Government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
  • (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to any banking company or banking companies for resolution of stressed assets. (2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise any banking company or banking companies on resolution of stressed assets.
What is main theme of this amendment?

In June, 2017, RBI identified 12 defaulters that account to 25% of India’s NPA (Non – Performing Assets). The NPAs were from steel, textiles, infrastructure and power sectors. They include Essar steel, ABG Shipyard, Electro steel and Alok industries, Bhushan steel, etc. This ordinance and then amendment act authorized RBI to ask banks to initiate insolvency proceedings against such defaulters for loan repayment under Insolvency and Bankruptcy code, 2016, and recover by resolving their assets.