Banking Regulation Act, 1949

BANKING REGULATION ACT,1949
Swayam Siddhi College of Mgt & Research
SSCMR Presentor : Prof. Rahul Shah

INTRODUCTION
• Banking means the accepting, for the purpose of lending
or investment, of deposits of money from the public,
repayable on demand or otherwise,and withdrawable
by cheque, draft, order orotherwise.
• Banking Company means any company which transacts the
business ofbanking in India.
Explanation: Any company which is engaged in the
manufacture of goods, or which carries on any trade, and
accepts deposits of money from the publicmerely for the
purpose of financing its business , shall not be deemed to
transact the business of banking within the meaning of this
clause.

ACT TO HAVE OVERRIDING EFFECT
Section 5A of the Banking Regulation Act, 1949 provides that
the provisions of this Act shall have effect notwithstanding
anything to the contrary contained in:
 Memorandum or Articles of a Banking Company
 Any agreement executed by it
Any resolution passed by the Banking Company in General
Meeting or by its Board of Directors, whether the same be
registered, executed or passed, as the case may be.
It is further provided that any provision contained in the
memorandum, articles, agreement or resolution aforesaid
shall, to the extent to which it is repugnant to the provisions
of the Act, become or be void.

RESTRICTION ON USE OF WORD ‘BANK’, ETC.
Section 7 of the Act provides that Individual, Firm or Group of
Individuals and any Company other than a Banking Company
shall not use as part of its name or, in connection with its
business, any of the words ‘bank’, ‘banker’ or ‘banking’
AND
No company shall carry on the business of banking in India unless it
uses as part of its name at least one of such words.
Exceptions:-
A Subsidiary of a Banking Company formed for one or more
of the purposes mentioned in Section 19(1), whose name
indicates that it is a subsidiary of that banking company.
Any association of banks formed for the protection of their
mutual interests and registered under Section 8 of the
Companies Act, 2013.

NOT TO ENGAGE IN TRADINGACTIVITIES
Section 8 provides that any banking company shall not directly or
indirectly deal in the buying or selling or bartering of goods, except
in connection with the realization of security given to or held by it,
or engage in any trade, or buy, sellor barter goods for others
otherwisethan:
• In connection with bills of exchange received for collection or
negotiation,or
• With such of its business as referred to in Section6(1)(i).
But this prohibition does not apply where a banking company is
authorized byCG by issue of notification under Section 6(1)(o).
Goods means every kind of moveable property, other than actionable
claims,stock, shares, money, bullion and specie and all instruments
referred to in Section 6(1)(a).

HOLDING AN IMMOVABLEPROPERTY
Section 9 provides that a banking company can hold any
immovable propertyonly as follows:
 If required for its own use
 Otherwise, upto a period of 7 years + 5 years with RBI
Approval.
Such extension may be granted where RBI is satisfied
that such extensionwould be in the interests of the
depositors of the bankingcompany.

PAYMENT OF BROKERAGE OR COMMISSION
Section 13 provides that a banking company can pay
out directly or indirectly,by way of
 Commission
 Brokerage
 Discount
 Remuneration
in any form in respect of any shares issued by it, any
amount not exceeding inthe aggregate two and a half
percent of the paid-up value of the saidshares.

CHARGE ON FLOATINGASSETS
Section 14: A charge shall not be created upon any unpaid capital of the
company, and any such charge shall be invalid.
Section 14A(1): A floating charge shall not be created on the
undertaking, or any property of the company or any part thereof,
unless the creation of such floating charge is certified in writing by
RBI as not being detrimental to the interests of the depositors of
such company.
Section 14A(2): Any such floating charge without obtaining the certificate
of RBI shall be invalid.
Section 14A(3): Any banking company aggrieved by the refusal of
certificate may, within 90 days from the date on which such refusal is
communicated to it, appeal to CG.
Section 14A(4): The decision of CG on an appeal filed under sub-section
(3) shall be final.

PAYMENT OF DIVIDEND
Section 15(1) provides that any banking company shall not
pay dividend on its shares until all its capitalized expenses
including the following have been completely written off.
 Preliminary Expenses
 Organization Expenses
 Share Selling Commission
 Brokerage
Amount of Losses Incurred, and
Any other item of expenditure not represented by tangible
assets

PAYMENT OF DIVIDEND
 Section 15(2) provides that a banking company may pay
dividends without writing off:
 Depreciation, if any, in the value of investments in
approved securities, in any case where such depreciation
has not actually been capitalized or otherwise accounted
for as a loss;
 Depreciation, if any, in the value of its investment in shares,
debentures or bonds (other than approved securities) in any
case where adequate provision for such depreciation has
been made to the satisfaction of the auditor of the banking
company.
 Bad debts, if any, in any case where adequate provision for

APPOINTMENT & VOTING RIGHTS OF DIRECTORS
 Section 16 provides that a banking company incorporated
in India shall not have any person as director on its Board
of Directors if such person is already a director in any
other company.
 The above condition does not apply in relation to a director
who is appointed by the RBI.
 Section 16(1)(a) provides that any banking company
incorporated in India shall not have in its BOD more than
three directors, which among themselves are entitled to
exercise voting rights in excess of 20% of the total voting
rights of all the shareholders of that banking company.

CREATION OF RESERVE
Section 17(1) provides that every banking company
incorporated in India shall transfer, before declaration of
dividend, at least 20% of the profit, as per P&LA/c, to
Reserve Fund.
However, CG may, on recommendation of RBI, having
regard to the adequacy of the paid-up capital & reserves
of a banking company in relation to its deposit liabilities,
declare by order in writing that the provisions of sub-
section (1) shallnot apply to the banking company for
such period as may be specified in theorder.
Such an order can be passed only when the amount in the
reserve fund together with the share premium account is
not less than the paid-up capital of thebanking company.

CREATION OF RESERVE
 Section 17(2) provides that where a banking
company appropriates any amount from the reserve
fund or share premium account , it shall within 21
days from the date of such appropriation report the
fact to RBI, explaining the circumstances relating to
such appropriation and RBI may, extend the period of
21 days bysuch period as it thinks fit or condone any
delay in the making of suchreport.

MAINTENANCE OF CASH RESERVE
Section 18 provides that every banking company, not being a scheduled
bank, shall maintain in India by way of Cash Reserve
 With itself, or
 By way of balance in a current account with the Reserve Bank, or
 By way of net balance in current accounts or in one or more of the
aforesaid ways,
 A sum equivalent to at least 4% of
 The total of its Demand & Time Liabilities in India
 As on the Last Friday of the second preceding fortnight and
 Shall submit to the Reserve Bank before the 20th day of every
month a return showing the amount so held on
 Alternate Fridays during a month

With particulars of its demand & time liabilities in India on such Friday,
or if such Friday is a public holiday under the Negotiable Instruments
Act, 1881, at the close of business on the preceding working day.
 Liabilities in India shall not include:
(a)The paid-up capital or the reserves, or any credit balance in
P&L A/c of the banking company.
(b)Any advance taken from the Reserve Bank, Development Bank,
Exim Bank, Reconstruction Bank, National Housing Bank, National
Bank, or Small Industries Bank by the Banking Company.
(c)In case of a Regional Rural Bank, also any loan taken by such
bank from its sponsor bank.

 Fortnight shall mean the period from Saturday to the second
following Friday, both days inclusive.
 Net Balance in Current A/cs shall, in relation to a banking company,
means the excess, if any, of the aggregate of the credit balance in
Current A/c maintained by that banking company with the State Bank
of India or a Subsidiary Bank or a corresponding new bank over the
aggregate of the credit balances in current account held by the said
banks with such banking company.
 The aggregate of the liabilities of the banking company to SBI, a
subsidiary bank, a corresponding new bank, an RRB, another banking
company, a co-operative bank, or any other financial institution
notified by CG in this behalf, shall be reduced by the aggregate of
liabilities of all such banks and institutions to the banking company.

BUSINESS ACTIVITIES OFSUBSIDIARY
Section19 provides that a banking company may form a subsidiary for
carrying on any of the following activities only:
 The undertaking of any business which, under clauses (a) to (o) of
Section 6, is
permissible for a banking company to undertake.
With the previous permission in writing of RBI, the carrying on of
the business of banking exclusively outside India.
The undertaking of such other business, which RBI may, with prior
approval of CG, consider to be conducive to the spread of banking in
India or to be otherwise useful or necessary in public interest.
A Banking Company cannot be considered to be engaged in the business
activity which is carried on by its subsidiary.

RESTRICTION ON HOLDING SHARES
OF ANOTHER COMPANY
Section 19(2): A Banking Company shall not hold shares in any
company, whether as:
 Pledgee
 Mortgagee
 Absolute Owner
of an amount exceeding 30% of:
 Paid-up share capital of that company, or
 Its own paid-up share capital under reserves, whichever is less.
This condition does not apply in respect of shares of the subsidiary
held by the banking company.

REGULATION OF LOANS & ADVANCES BYRBI
Section 20: Any banking company shall not:
o Grant any loans or advances on the security of its own shares
o Enter into any commitment for granting any loan or advance to or on
behalf of:
(a)Any of its Directors
(b)Any firm in which any of its directors is interested as Partner,
Manager, Employee or Guarantor
(c)Any company, not being its subsidiary, or a company registered under
Sec 8 of Companies Act, 2013, or a government company, of which or
the subsidiary or holding of which any of the Directors of the banking
company is a Director, Managing Agent, Manager, Employee or
Guarantor, or in which he holds substantial interest
(d)Any individual in respect of whom any of its directors is a Partner or
Guarantor.

NO REMISSION WITHOUT PRIOR APPROVALOF RBI
Section 20A(1): Except with the prior approval of RBI, a
banking company shallnot remit in whole or in part any
debt due to itby:
Any of its directors
Any firm or company in which any of its directors is
interested asDirector, Partner, Managing Agent or
Guarantor
Any individual if any of its directors, is his Partner or
Guarantor.
Section 20A(2): Any remission of debt in contravention of the
aforesaid shall bevoid and of no effect.

POWER OF RBI TO REGULATEADVANCES
Section 21: Where RBI is satisfied that it is necessary or expedient in public interest
or in the interest of depositors to do so, it may determine the policy in relation to
advances to be followed by banking companies or any particular banking
company, and such company shall be bound to follow such policy. The directions
can be as follows:
 Purposes for which advances may or may not be made;
 Margins to be maintained in respect of secured advances;
 Maximum amount of advances or other financial accomodation which, having
regard to the paid-up capital, reserves and deposits of banking company and
other relevant considerations, may be made by that banking company to any
company, firm, AOP or individual;
 Maximum amount up to which, having regard to the above considerations,
guarantees may be given by a banking company on behalf of any company, firm,
AOP or individual.
 The rate of interest and other terms & conditions on which advances or other
financial accomodation may be made or guarantees may be given.

BANK CANNOT BE SUED FOR CHARGING EXCESS INTEREST
 Section 21A: A transaction between a banking company
and its debtor shall not be reopened by any court on the
ground that the rate of interest charged by the banking
company in respect of such transaction isexcessive.
 The provisions of this section have overriding effect over
Usurious Loans Act,1918, or any other law relating to
indebtedness in force in anyState.
 Thus, court cannot take any action against thebank.

REMOVAL OF MANAGERIAL PERSONNELBY RB
Section 36AA: Whenever RBI is satisfied that it is necessary to do so
 In public interest, or
 For preventing the affairs of a banking company
(a) Being conducted in a manner detrimental to the interests of the
depositors, or
(b)For securing the proper management of any banking company
RBI may, for reasons to be recorded in writing, by order, remove from
office, any Chairman, Director, Chief Executive Officer, or other officer
or employee of the banking company, after giving an opportunity of
making representation, with effect from such date as may be
specified in the order.

REMOVAL OF MANAGERIAL PERSONNELBY
RBI
But if, in the opinion of RBI, any delay would be detrimental to
the interests of the company or its depositors, RBI may, at
the time of giving opportunity aforesaidor at any time
thereafter, by order direct that, pending the consideration of
the representation aforesaid, if any, the Chairman/
Director/ CEO/ Other Officer or Employee, shall not, with
effect from the date of such order:
Act as such Chairman/ Director/ CEO/ Other Officer or
Employee
In any way, whether directly or indirectly, be concerned
with, or take part inthe management of the banking Co.

APPEAL

EFFECT OF REMOVAL
Ceases to hold position
Shall not be concerned
with, or take part in the
management for such
period not exceeding 5
years, as may be specified
in the order

PENALTY FOR CONTRAVENTION
• Rs. 250 for each day during which
the contravention continuesFine
• Notwithstanding anything contained in
any law or in any contract,
memorandum or articles of
association, the person shall not be
entitled to claim any compensation for
loss of office
Loss of
Office

APPOINTMENT OF NEW PERSON
The person so appointed shall hold office during the
pleasure of RBI and subject thereto for a period not
exceeding 3 years or such further periods not exceeding
3 years at a time as RBI may specify
The person shall not incur any obligation or liability by
reason only of his being a Chairman/ Director/ CEO/
Other Officer or Employee, or for anything done or
omitted to be done in good faith in the execution of
duties of his office or in relation thereto.

POWER TO APPOINT ADDITIONALDIRECTOR
Section 36AB: RBI can appoint one or more
additional directors on BOD ofa banking
company whenever it forms an opinion that it is
in the interestof:
 Banking Policy, or
 Public Interest, or
 Banking Company, or
 Depositors.

POWER TO APPOINT ADDITIONALDIRECTOR
The additional directors so appointed:
 Shall hold office during the pleasure of RBI and subject thereto for a
period not exceeding 3 years or such further periods not exceeding
3 years at a time asRBI may specify;
 Shall not incur any obligation or liability by reason only of his being
aChairman/ Director/ CEO/ Other Officer or Employee, or for
anything done or omitted to be done in good faith in the execution
of duties of his office or in relationthereto;
 Shall not be required to hold qualification shares in the banking
company.
Such additional directors shall not be considered for the purpose of
reckoningany proportion of the total number of directors of the
bankingcompany.

POWER OF CG TO ACQUIREBANKING BUSINESS
Section 36AE: On the basis of report of RBI, if CG is
satisfied that abanking company:
 Failed to comply its directions > 1 occasion
Managed in a manner which is detrimental to the
interest ofdepositors. Option 1:
CG, in consultation with RBI, may acquire undertaking of
such Co., includingall its assets & liabilities.
Thereupon, all assets & liabilities of acquired bank shall
stand transferred toCG.

POWER OF CG TO ACQUIREBANKING BUSINESS
Option 2:
If CG is satisfied that undertaking including all assets & liabilities
should vest in any other Co., CG may make such order.
Transferee bank shall be deemed as transferee of acquired bank, and
all assets & liabilities of acquired bank shall be deemed as of
transferee bank.
Any appeal against or by acquired bank shall be continued by or
against CG or transferee bank.
 CG/ Transferee Bank shall compensate every shareholder.
Compensation will be decided by CG (If takeover by CG) or
Transferee Bank, in consultation with RBI.
If compensation not acceptable, such person may request CG to refer
the case to tribunal.

THANK YOU!!!

Banking Regulation Act, 1949

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