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.
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:
With regard to the management of a banking company, Section 10 provides as follows:
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:
According to Section 20, the following restrictions have been laid down on loans and advances of a bank:
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:
The Reserve Bank may cancel a licence granted to a bank in the following circumstances:
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:
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:
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.