Before 1949, the banks were supervised under the Companies Act, 1913, but this
Act was not sufficient to regulate banks because there was no guarantee of
money, fraud, poor liquidity of banks. Then the Banking Regulation Act, 1949
came into the picture. It regulates and controls the banks which are established
- To consolidate and amend the law relating to banking companies.
- To check the abuse of power by managers of banks and also to safeguard
the interest of depositors and the interest of the country in general.
The act is divided into parts and consists of 56 sections in total. Some of them
are mentioned herein:
Section 11 - Minimum paid-up capital
- Section 5 - Definitions
It defines various terms, including banking, banking company, approved
securities, branch, banking policy, etc.
Banking has been defined under 5B as:
- Accepting deposits of money from the public,
- For lending or investments,
- Repayable on demand or otherwise,
- Withdrawable by cheque, draft, order, or otherwise.
- Banking company, likewise under section 5C, has been as any company transacting
in banking in India.
- Section 6 - Tradeable business
It deals with businesses where companies, specifically banking companies, may
engage. It says a banking company may be involved in the business of borrowing
or lending money; buying or selling bills of exchange, promissory notes,
coupons, drafts, bills of lading, railway receipts, warrants, debentures; buying
or selling of foreign exchange; dealing stock, funds, shares, debentures, bonds;
carrying on agency business such as clearing and forwarding of goods; conducting
the business of guarantee and indemnity, etc.
- Section 8 - Prohibition of trading
Trading is prohibited under Section 8 of this Act. No banking company shall
directly or indirectly deal in the buying or selling, or bartering of goods
except when it is selling the goods kept in its security. The bank should also
not engage in any trade or buy, sell or barter goods except for bills of
exchange received due to collection or negotiation.
- Section 9 - Non-banking asset's disposal
It mentions nonbanking assets' disposal by the banking companies. It directs no
possession by a banking company of a property for more than seven years except
those needed for its use. The period can be further extended by five years at
the discretion of the RBI.
- Section 10 - Management of bank
It illustrates how the management of the company should be organised. It should
have one of the directors as the chairman on board of directors and at least 51%
of the total number of members on the board of directors should be experienced
in the areas of accountancy, agriculture and rural economy, banking, finance,
economics, law and other such places of importance. Moreover, no insolvent
person whose remuneration depends on the company's profit should be employed.
The director's term should be at most eight years.
Minimum paid-up capital and reserve requirements are detailed in section 11,
wherein any company outside India must have a total of its paid-up capital of
more than 15 lakhs. In the case of Bombay or Calcutta, the amount should be at
least 20 lakhs. Also, no company in existence at the time of the commencement of
the act may continue or carry on business after three years unless at the
discretion of the RBI.
Section 15 - Payment of dividends
No banking company could pay dividends on its shares for any uncleared
Section 18- Reserve Fund
Every banking company must form a reserve fund and must transfer at least twenty
percent of its profit to the reserve fund. Each banking company must report to
the Reserve Bank if it has appropriated any funds from the reserve fund.
Section 29- Accounts and balance sheet
The legislation also imposes on the banking companies the responsibility to
submit accounts and balance sheets at the end of every financial year under
section 29. Such accounts and balance sheets should bear the sign of at least
three directors in case of a company located in India and by a principal officer
in case of outside India.
Section 36- Powers and functions of RBI
The Reserve Bank may prohibit banking companies from entering into a particular
transaction and can advise the banking company. It can also assist the banking
company by granting loans or advances under Section 18. It can direct the
banking company to call for a meeting of its directors to discuss the matters of
the company. It can also appoint officers to observe how the affairs of the
banking company are conducted.
Dharani Sugars and Chemicals Ltd. vs. Union of India
The case dating back to 2018 dealt with the validity of sections 35AA and 35AB
of the Banking Regulation Act, 1979, which relates to the powers of RBI on
authorization by the Central Government to issue and monitor directions to the
Banking companies for insolvency and realisation of stressed assets. The court
opined in this case that both the sections were constitutionally valid and held
section 35AA to be more restrictive of the powers of RBI according to procedures
to be observed. It, however, rejected the circular, which RBI passed.
The Banking Regulation Act of 199 is a statutory provision that controls all the
banking companies in the countries. After an amendment, it now applies to
cooperative banks. It awards the Reserve Bank of India controller, supervisor,
and regulator positions. The statute aims to protect the interest of the
depositors by increasing the banks' liabilities.