The law relating to banking in India today is the outcome of gradual process of evolution before 1949. The Indian companies Act 1913 contained special provisions relating to banking companies, which were inadequate and were subsequently incorporated in the comprehensive legislation passed in 1949 under the name of Banking Regulation Act 1949. This Act was suitably amended a number of times to insert new provisions and to amend the existing ones to suit the needs of changing circumstances.

The original Act had 56 sections housed in five parts and five schedules. After the amendments the Act of 1949 has 70 sections in Ten parts.

1. A comprehensive definition of banking so as to bring within the scope of the legislation all institutions which receive deposits, repayable on demand or otherwise for lending or investment.
2. Prohibition of non-banking companies from accepting deposits repayable on demand.
3. Prohibition of trading to eliminate non-banking risks.
4. Prescription of minimum capital standards.
5. Limiting the payments of dividends.
6. Inclusion the scope of legislation of banks registered outside the provinces of India.
7. Introduction of comprehensive system of licensing of banks and their branches.
8. Prescription of a special form of balance sheet and conferring of powers on the Reserve Bank to call for periodical returns.
9. Inspection of books and accounts of a bank by Reserve Bank.
10. Empowering the central government to take action against banks conducting their affairs in a manner detrimental to the interests of the depositors.
11. Provision for bringing the Reserve Bank of India into closer touch with banking companies.
12. Provision of an expeditious procedure for liquidation.
13. Bringing the imperial bank of India within the purview of some of the provisions of the Bill.
14. Widening the powers of the Reserve Bank of India so as to enable it to come to the aid of banking companies in times of emergencies.
15. Provision for the extension of the Act to acceding states.

All the provisions of the Act have been divided into five parts. There are in all fifty-six Sections and five Schedules attached to the Act. The main provisions or contents or characteristics of the Act may be summarised as:

According to Section 1, the Act is called the Banking Regulation Act, 1949. It extends to the whole of India. It came into force on 16th March, 1949. A chit fund transaction under the Chit Fund Act, 1982 is also a banking transaction and is covered under the Banking Regulation Act. 1949.

According to Section 5(b), “banking” means the accepting of deposits of money from the public for the purpose of lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. It may be noted that “banking does not include other commercial activities carried on by a banking company”.

Section 5(c) states that “banking company” means any company which transacts the business of banking in India. According to explanation to Section 5, 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, shall not be deemed to transact the business of banking, and therefore shall not be called a “banking company”.

Section 7 stipulates that every banking company, and no other company, shall use any of the words “bank”, “banker”, or “banking” as part of its name. Only then, it can carry on the business of banking in India.

Section 6 provides a list of various forms of business which a banking company may do in addition to the business of banking.

According to Section 8 and 9, the banks cannot engage themselves in carrying on the following activities:

1. No banking company shall directly or indirectly deal in the buying or selling or bartering of goods, or engage in any trade.
2. No banking company shall buy or sell, or barter goods for others.
3. No banking company shall hold any immovable property howsoever acquired for more than 7 years from the acquisition thereof. However, it can hold any immovable property required for its own use.

With regard to the management of a banking company, Section 10 provides as follows:

1. A banking company cannot employ or be managed by a managing agent.
2. It cannot employ “any person” who has been adjudicated insolvent, or has been convicted by a criminal Court for any act of moral turpitude; who is a director of any other company; who is engaged in any other business or vocation; whose terra of office as a person managing the company is for more than 5 years at any one time; whose total remuneration or its part takes the form of commission or of a share in the profits of the company; and whose remuneration is excessive in the opinion of the Reserve Bank of India.
3. The board of directors of a banking company shall include not less than 51% of its total number of members, persons with professional or other practical experience in the matters such as accountancy, agriculture and rural economy, banking, cooperation, economics, finance, law, small scale industry, etc.
4. Every banking company shall be managed by a whole-time chairman who shall be entrusted with the management of the whole of its affairs. The chairman shall exercise his powers subject to the superintendence, control, and direction of the board of directors. The chairman shall be one of the directors.
5. Section 16 prohibits common directors and states that a banking company cannot have a person as director, who is a director of any other banking company.

According to Section 11, the aggregate value of a banking company's paid-up capital and reserves shall not be less than Rs. 5 lakhs, if the bank has been established after 16th September, 1962. This minimum amount varies according to the number of places of business in one or more states and also with the nature of banks such as Indian banks and foreign banks whose branches are in India. Section 12 states that the subscribed capital of a banking company cannot be less than 50% of the authorised capital, and the paid-up capital cannot be less than 50% of the subscribed capital. Further, the capital of the company shall consist of ordinary shares or equity shares only. A shareholder cannot exercise Ms voting rights on poll in excess of 10% of the total voting rights of all the shareholders of the banking company.

According to Section 17, every banking company shall create a Reserve Fund (known as Statutory Reserve Fund), and before declaring any dividend, transfer to it at least 20% of its profit each year) When the amount in the reserve fund together with the amount in the share premium account equals the paid-up capital, then (and not before that) the Central Government on the recommendation of the Reserve Bank, can allow a banking company not to transfer the stipulated 20% of profit to the reserve fund. The Reserve Fund cannot be used for any purpose until it is equal to the paid-up capital. Where a banking company appropriates (uses) any amount from the Reserve Fund or the share premium account, it shall report the fact to the Reserve Bank within 21 days of such appropriation, explaining the circumstances thereof.

Section 18 states that every unscheduled bank shall maintain a Cash reserve with itself or in a current account with the Reserve Bank equal to at least 3% (increasable up to a maximum of 15%) of the total of its demand and time liabilities in India.

According to Section 24, every bank shall maintain a liquid reserve in cash, gold or unencumbered approved securities at least 25% of the total of its demand and time liabilities in India.

According to Section 15, no bank shall pay any dividend on its shares until all its capitalised, expenses (including preliminary expenses, organisation expenses, share-selling commission, brokerage, amount of losses incurred or any other item of expenditure on intangible assets) have been completely written off. However, the bank may pay such dividends without writing off the depreciation on investment in approved securities, or the depreciation on investment in shares, debentures or bonds (other than approved securities), and the bad debts.

Section 19 states that a banking company cannot form any subsidiary company. However, it may establish a subsidiary company in the following circumstances:

1. To undertake any one or more forms of business permissible for a banking company under Section 6; or
2. To carry on the business of banking exclusively outside India. However, before creating a subsidiary company for this purpose, previous permission in writing of the Reserve Bank is necessary; or
3. To undertake such other business which the Reserve Bank may, with the prior approval of the Central Government, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in the public interest.

According to Section 20, the following restrictions have been laid down on loans and advances of a bank:

1. A bank cannot grant any loans or advances on the security of its own shares.
2. It cannot enter into any commitment for granting any loan or advance to or on behalf of any of its directors; any firm in which any of its directors is interested as partner, manager, employee, or guarantor; any company in which any of the directors of the bank is a director, managing agent, manager, employee, or guarantor; any company in which any of the directors of the bank holds substantial interest; or, any individual in respect of whom any of its directors is a partner or guarantor.
3. A bank cannot remit (mitigate or leave) the whole or any part of a loan or advance granted by it, without the previous approval of the Reserve Bank. Any remission without such approval shall be void and of no effect.

According to Section 22, a banking company cannot carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank. Before commencing banking business in India, every banking company shall apply in writing to the Reserve bank for a licence. Before granting any licence, the Reserve Bank has to be satisfied that the following conditions have been fulfilled:

1. The banking company is or will be in a position to pay its present or future depositors in full as their claims accrue.
2. The affairs of the company are not being or likely to be conducted in manner detrimental to the interests of its present or future depositors.
3. The general character of the proposed management of the company will not be prejudicial to the public interest or the interest of its depositors.
4. The company has adequate capital structure and earning prospects.
5. The public interest will be served by the grant of a licence to the company to carry on banking business in India.
6. Having regard to existing banking facilities and the potential scope for expansion of banks in the proposed area, the grant of licence would not be prejudicial to the operation and consolidation of the banking system with monetary stability and economic growth.
7. Any other condition, the fulfilment of which would be in the public interest or the interests of the depositors, in the opinion of the Reserve Bank.

The Reserve Bank may cancel a licence granted to a bank in the following circumstances:

1. if the bank ceases to carry on banking business in India; or
2. if the bank fails to comply with any of the conditions imposed upon it by the Act.

However, the aggrieved bank may appeal to the Central Government against the decision of the Reserve Bank for cancelling the licence, whose decision in the matter shall be final.

Section 23 provides that without obtaining the prior permission of the Reserve Bank, a banking company cannot open a new branch. It cannot change the location of an existing branch. The same restriction applies to opening or transferring branches outside India. However, a temporary branch may be opened for a, maximum period of one month for the purpose of affording banking facilities to the public on the occasion of an exhibition, a conference, or a 'mela' or any other similar occasion, if the banking company already has a branch in that city, town, or village.

A banking company is required to observe and comply with the following requirements:

1. As per Section 25, every banking company shall maintain its assets in India at least 75% of its demand and time liabilities in India. It shall submit to the Reserve Bank a quarterly return of its assets and liabilities.
2. As per Section 26, every banking company shall submit an annual return of each calendar year to the Reserve Bank with the details of all accounts which have not been operated upon for 10 years.
3. As per Section 27, every banking company shall submit a monthly return to the Reserve Bank showing its assets and liabilities in India. The Reserve Bank has power to call for other returns and information which it may consider necessary or expedient.
4. As per Section 29, at the expiry of each calendar year, every banking company shall prepare a balance sheet and profit and loss account for that year in the forms set out in the Third Schedule or as near thereto as circumstances admit.
5. As per Section 30, the balance sheet and profit and loss account shall be audited by a person duly qualified to be an auditor of companies.
6. As per Section 31, the accounts, balance sheet and profit and loss account together with auditor's report shall be published in prescribed manner and three copies thereof shall be furnished as returns to the Reserve Bank, and as per Section 32, the same number of copies shall also be sent to the Registrar.
7. As per Section 33, banking companies incorporated outside India shall display at their principal offices and in every branch office in India, a copy of its first audited balance-sheet and profit and loss account, in a conspicuous place. Section 34A protects a banking company from being compelled to give confidential documents and information. Similarly, an employee of the bank cannot be compelled to do so (AIR 1983).

According to Section 35, the Reserve Bank on its own or on being directed by the Central Government, can cause an inspection of any banking company and its books and accounts; may also cause a scrutiny of its affairs and books and accounts, and the officers of the company shall have to fully cooperate with it. The Reserve Bank shall supply a copy of its report on such inspection or scrutiny to the banking company, and to the Central Government if the inspection has been directed by her.

According to Section 36AD, any person must not obstruct the business of a banking company; must not hold within its office any demonstration which is violent or which prevents its normal business; and must not act in any manner calculated to undermine the confidence of the depositors in the banking company. Whosoever contravenes these provisions without any reasonable excuse, shall be punishable with imprisonment for a term which may extend to 6 months, or with fine which may extend to Rs. 1,000 or with both.

Section 36AE states that the Central Government has the power to acquire undertakings of a banking company if upon receipt of a report from the Reserve Bank, she is satisfied that the banking company has failed to comply with the Reserve Bank's policy in relation to advances or the directions given by it, or is being managed in a manner detrimental to the interests of its depositors, after giving a reasonable opportunity of showing cause against the proposed action. As per Section 36AG, compensation shall be given to shareholders of the acquired bank.

According to Section 37, if a banking company is temporarily unable to meet its obligations, it may apply for a moratorium to the High Court. (Moratorium means a legally authorised postponement of fulfilment of an obligation). The High Court may make an order staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it may think fit and proper. However, the total period of moratorium shall not exceed 6 months. The High Court shall forward a copy of its order of moratorium to the Reserve Bank. As per Section 38, the High Court can order the winding up of a banking company if it is unable to pay its debts, or if an application for its winding up has been made by the Reserve Bank.

The Reserve Bank may make an application for the winding up of a banking company:

1. If the banking company has failed to comply with the requirements concerning minimum paid-up capital and reserves, or has become disentitled to carry on banking business due to non-fulfilment of any of the licensing conditions; or has been prohibited from receiving fresh deposits by an order of the Reserve Bank; or has contravened any provision of the Banking Regulation Act; or
2. If in the opinion of the Reserve Bank a compromise or arrangement sanctioned by a Court cannot be worked satisfactorily with or without modifications; or the returns and information furnished to it disclose that the company is unable to pay its debts; or the continuance of the company is prejudicial to the interests of its depositors.

According to Section 44A, a banking company cannot be amalgamated with another banking company, unless a scheme containing the terms of such amalgamation has been placed in draft before the shareholders of each of such companies separately, and approved by a resolution passed by a 2/3rd majority of shareholders of each of the said companies, present either in person or by proxy at a meeting called for the purpose.

According to Section 49A, no person other than a bank shall accept deposits of money withdrawable by cheque.

According to Section 49B, a banking company can change its name if tie Reserve Bank has no objection to such change and the Central Government gives its approval to such change.

According to Section 52, after consultation with the Reserve Bank, the Central Government may make rules to provide for all matters for which provision is necessary or expedient for the purpose of giving effect to the provisions of this Act and all such rules shall be published in the official Gazette.

Section 53 states that on the recommendation of the Reserve Bank, the Central Government may declare by notification in the official Gazette that any or all of the provisions of the Act shall not apply to any banking company or institution generally or for such period as may be specified.

According to Section 56, the provisions of this Act shall apply to cooperative societies as they apply to banking companies, but subject to certain modifications.