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Banking Regulation Act Research Team | Posted On Wednesday, December 05,2018, 04:03 PM

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Banking Regulation Act



What is banking regulation act 1949?

The Banking Regulation act 1949 is a legislation in India, that states all banking firms will be regulated under this act. There are a total of 55 Sections under the banking regulating act. Initially the law was only applicable to banks, but after 1965, it was amended to make it applicable to co-operative banks and also to introduce other changes. The act provides a framework that regulates and supervises commercial banks in India. This act gives power to the RBI to exercise control and regulate banks under supervision.

Introduction of banking regulation act 1949:

The act came into force on March 16th 1949. It relates to various aspects vis-a-vis banking in India. The main objective of the banking regulation act is to ensure sound banking through regulations covering the opening of branches and the maintenance of liquid assets.

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Objectives of banking regulation act 1949:

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

  • The provision of the Indian Companies Act 1913 was found inadequate to regulate banks in India. Therefore a need was felt to introduce a specific legislation having comprehensive coverage on issues relating to the banking business in India.
  • Due to inadequacy of capital, many banks failed and therefore prescribing a minimum capital requirement was felt necessary. The banking regulation act brought in certain minimum capital requirements for banks.
  • The key objectives of this act was to cut competition among banks. The act has regulated the opening of branches and also changing the location of existing branches.
  • To prevent random opening of new branches and ensure balanced development of banks through the system of licensing.
  • Assigning power to RBI to appoint, reappoint and remove the chairman, director and officers of the banks. This could ensure the smooth and efficient functioning of banks in India.
  • To protect the interest of depositors and public at large by incorporating certain provisions like prescribing cash reserve ratio and liquidity reserve ratios.
  • Provide compulsory amalgamation of weaker banks with senior banks, and thereby strengthen the banking system in India.
  • Introduce provisions to restrict foreign banks investing funds of Indian depositors outside India.
  • Provide quick and easy liquidation of banks, when they are unable to continue operations or amalgamate with other banks.

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Banking Regulation Act

 History of Banking Regulation Act 1949:

Banking in India originated in the last decades of the 18th century. Prior to Nationalization, the majority of the banks were private banks. Private Banks were class based and there would be monopolies that would only benefit a few people. With the nationalization of the banks, the credit scenario changes benefitted all Sections of society and contributed to overall prosperity.

The Indian government recognized the need to bring the banks under some form of government control, to be able to finance India’s growing financial needs. On 19th July 1969, 14 major Indian commercial banks of the country were nationalized. After independence, the Government of India came up with the Banking Companies Act, 1949, later changed to Banking Regulation Act 1949 as per the amending Act of 1965, under which the Reserve Bank of India was bestowed with extensive powers for the supervision of banking in India as the central banking authority.

Features of banking regulation act 1949:

The main features of the banking regulation act are as follows:

  • Prohibition of trading (Section 8): According to Section 8 of the Banking Regulation Act, a bank cannot directly or indirectly deal with buying or selling or bartering of goods. However it may barter the transactions relating to bills of exchange received for collection or negotiation.
  • Non-banking asset (Section 9): A bank cannot hold any immovable property, howsoever acquired, except for its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within a period of seven years, to deal or trade in any such property for facilitating its disposal.
  • Management (Section 10): This rule states that every bank shall have one of its directors as Chairman on its Board of Directors. It also states that not less than 51% of the total number of members of the Board of Directors of a bank shall consist of persons who have special knowledge or practical experience in accountancy, agriculture, banking, economics, finance, law and co-operatives.
  • Minimum capital (Section 11): Section 11 (2) of the Banking Regulation Act, 1949, states that no bank shall commence or carry on business in India, unless it has minimum paid-up capital and cash reserve prescribed by the RBI.
  • Payment of commission (Section 13): According to Section 13, a bank is not permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration on issues of its shares in excess of 2.5% of the paid-up value of such shares.
  • Payment of dividend (Section 15): According to Section 15, no bank shall pay any dividend on its shares until all its capital expenses (including preliminary expenses, organisation expenses, share selling commission, brokerage, amount of losses incurred and other items of expenditure not represented by tangible assets) have been completely written-off.

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Importance of Banking Regulation Act 1949:

  • Banking Regulation Act gives the power to RBI to license banks and also the regulation of the shareholding.
  • It grants power to RBI to conduct appointment of the boards and management members of banks.
  • It also lays down directions for audits to be managed by RBI, and control merging and liquidation.
  • RBI issues directives on banking policy in the interests of public good and can impose penalties if required.
  • Co-operative Banks were incorporated under this act in the amendment of 1965.

 Section 6 of banking regulation act:

The Section 6 of the banking regulation act comprises of the permitted business of banks. The act consists of the following points:

  • Banking for borrowing, raising or taking up of money, selling, collecting and dealing in the bills of exchange, promissory notes, railway receipts.
  • Acting as agents on behalf of the Government.
  • Contracting for public and private loans and issuing the same.
  • Managing the selling and realizing any property which may come into the possession of the company.
  • Undertaking and executing trusts.
  • Dealing with acquisition, construction and maintenance of the building.

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