INDIAN BANKING SYSTEM Unit -3 , Notes BBA code N302

 

IBS

Unit 3

Banking Regulation Act, 1949: History, Social Control, Banking Regulation Act as applicable to banking companies and public sector banks, Banking Regulation Act as applicable to Cooperative banks.

Banking Regulation Act of 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. 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.

 

Objectives of banking regulation act 1949

 

The Banking Regulations Act was enacted in February 1949 with the following objectives provision of the Indian Companies Act 1913 was found inadequate to regulate banks in India. Therefore a need was felt to introduce specific legislation having comprehensive coverage on issues relating to the banking business in India.

Due to the 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 objective 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.

1-To prevent the random opening of new branches and ensure the balanced development of banks through the system of licensing.

2-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.

3-To protect the interest of depositors and the public at large by incorporating certain provisions like prescribing cash reserve ratio and liquidity reserve ratios.

The 4-Provide compulsory amalgamation of weaker banks with senior banks, and thereby strengthen the banking system in India.

5-Introduce provisions to restrict foreign banks from investing funds of Indian depositors outside India.

6-Provide quick and easy liquidation of banks, when they are unable to continue operations or amalgamate with other banks.

 

 

Banking Regulation Act

 

History of Banking Regulation Act 1949

Banking in India originated in the last decades of the 18th century. Before 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

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 is 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, the 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 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 more than 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, organization expenses, share selling the commission, brokerage, amount of losses incurred, and other items

of expenditure not represented by tangible assets) have been completely written-off.

 

Importance of Banking Regulation Act 1949:

1-It grants power to RBI to conduct appointments of the boards and management members of banks.

2-It also lays down directions for audits to be managed by RBI, and control merging and liquidation.

3-RBI issues directives on banking policy in the interests of public good and can impose penalties if required.

4-Co-operative Banks were incorporated under this act in the amendment of 1965.

 .

Social Control

The banks are the custodians of savings and powerful institutions to provide credit. They mobilize the resources from all the sections of the community by way of deposits and channelize them to industries and others by way of granting loans. In 1955 the Imperial Bank of India was nationalized and SBI was constituted.

It was observed that the commercial banks were directing their advances to the large and medium scale industries and the priority sectors such as agriculture, small-scale indus­tries, and exports were neglected.

 

The chairmen and directors of banks were mostly indus­trialists and many of them were interested in sanctioning large amounts of loans and ad­vances to the industries with which they were connected.

 

To overcome these deficiencies found in the working of the banks, the Banking Laws (Amendment) Act was passed in December 1968 and came into force on 1-2-1969. It is known as the scheme of ‘social control’ over the banks.

 

The then Deputy Prime Minister, Mr. Morarji Desai made a statement in the Parliament on the eve of introducing the bill to amend the banking laws Act.

 

He explained that the aim of social control was, “to regulate our social and economic life to attain the optimum growth rate for our economy and to prevent at the same time monopolistic trend, the concentration of economic power and misdirection of resources”.

 

The following are the main provisions of this amendment,

 

Bigger banks had to be managed by a whole-time chairman possessing special knowl­edge and practical experience of the working of a banking company or finance, economics, or business administration.

 

The majority of directors had to be persons with special knowledge or practical experience in any of the areas such as accountancy, agriculture, and rural economy, banking, co-operative, economics, finance, law, small-scale industries, etc.

 

The banks were also prohibited from making any loans or advances secured or unsecured to their directors or to any companies in which they have a substantial interest.

 

Important sections of Banking Regulation Act, 1949

The act has 56 sections.

The most important among them are:

Section 10BB: Power of the RBI to appoint the chairman of the board of directors on a whole-time basis or a managing director of a banking company.

Section 11: Requirement as to minimum paid-up capital and reserves. Section 12: Regulation of paid-up capital, subscribed capital, and authorized capital and voting rights of shareholders.

Section 17: Reserve fund

Section 18: Cash reserve Section 20: Restrictions on loans and advances Section 21: Power of RBI to control advances by banking companies.

 Section 21A: Rates of interest charged by banking companies not to be subject to scrutiny by courts.

Section 22: Licensing of banking companies.

 Section 23: Prohibits banks from opening a new place of business (branches) in India or abroad, change of premises other than within the same city, town, or village, without prior approval of the RBI.

Section 26: Each banking company to submit an annual return to the RBI in respect of all accounts in India which have not been operated for up to 10 years.

 Section 29: Accounts and balance sheet.

Section 36AA: Power of RBI to remove managerial and other persons from office.

 Section 36AB: Power of RBI to appoint additional directors.

Section 36AE: Power of the central government to acquire undertakings of banking companies in certain cases.

 Section 39: RBI to be an official liquidator. Section 46: Penalties

. Section 47A: Power of RBI to impose penalties.

 Section 49: Special provisions private banking companies.

 Section 49A: Restriction on acceptance of deposit withdrawal by cheque.

Section 49B: Change of name by a banking

 

Banking Company

 

Banking Company is a company which transacts the business of banking in India. This the company fulfills the state of affairs of being a company as given in companies’ act of 1956.

The business allowed for a banking company (Section 6)

 

• Lending/Borrowing of money with/ without security, issuing travelers’ cheque, buying & selling foreign exchange notes, deposits vaults, collecting & transmitting money & securities, buying bonds, and other securities on the behalf of customers.

• Transacting and carrying on every kind of guarantee & indemnity business.

• Selling, managing & realizing any property which comes in possession of the bank in the procedure of settlements of claims.

• Executing and undertaking trusts

• Other works which are advancements of the main purpose of the company or incidental

• A form of business that is defined by the Central Government in its issued notification

 

Prohibition on trading (Section 8)

A banking company cannot get in directly or indirectly contracts in buying or selling or exchange of goods.

Disposal of Non-Banking assets (Section 9)

Banks cannot hold any property for more than 7 years for settlements of debts or obligations. Such a time limit of 7 years can be augmented by the Reserve Bank of India for another 5 years if it thinks appropriate.

Reserve fund (section 17)

Every banking company must generate a reserve fund out of its earnings after tax and interest. Such a reserve amount should be at any rate 20 percent of such profits. The exemption can be provided only if the cumulative amount of reserve fund & securities premium is greater than the paid-up capital of the company.

Cash reserve (Section 18)

 

At least 3 percent of the total demand & time liabilities should be kept as a cash reserve or should be secured in the current account with the Reserve Bank of India. Liabilities will not comprise monies received from Reserve Bank of India/ EXIM bank/ Development bank or any such other bank. Such amount should be deposited/ kept on last Friday of every 2nd fortnight of every month. The return should be deposited before the twentieth day of every month stating the particulars of the amount deposited to the Reserve Bank of India.

 

Accounts & balance sheet (Section 29)

 

Banking companies should plan a balance sheet and profit & loss account on the last working day of every accounting year in the forms set out in the third schedule. Accounts must be signed by at least three directors where the number of directors exceeds three. If the number of directors falls short of three, then all directors must sign the accounts. In the case of a banking company incorporated outside the nation, accounts must be signed by the principal officer or manager of the company in India.

 

Auditing of Banking Company (section 30)

• Balance sheet and Profit & Loss made compliant with section 29 must be audited by a person qualified under law to discharge his duties as an auditor
• The banking company must obtain the approval of the Reserve Bank of India before removing/ appointing and reappointment auditors.
• When the Reserve Bank of India is not satisfied with the financial statements of the bank, it can give the order for carrying out a special audit. And the cost of such special audit must be put up by the banking company itself.
• The liabilities, powers, and scope of an auditor are the same as given in section 227 of companies act 1956.

Additional disclosure requirements

• Whether the details given are correct & present fair and true view, whether transactions are done by the company comes under the purview of companies' powers.
• Safety of assets
• Any other matter which needs to be disclosed
• Such a report of the auditor must be submitted to the Reserve Bank of India in three copies in a prescribed manner.  Reserve Bank of India may extend the period of three months for furnishing of such returns if Reserve Bank of India finds it justified to do so.