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.
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