Salient provisions Banking Regulation Act, 1949
1. Use of words ‘bank’,
‘banker’, ‘banking’ or ‘banking company’ (Sec.7): According to Sec. 7
of the Banking Regulation Act, no company other than a banking company shall
use the words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ and no company shall
carry on the business of banking in India, unless it uses the above mentioned
words in its name.
2. Prohibition of Trading (Sec.
8): According to Sec. 8 of the Banking Regulation
Act, a banking company cannot directly or indirectly deal in buying or selling
or bartering of goods. But it may, however, buy, sell or barter the
transactions relating to bills of exchange received for collection or
negotiation.
3. Disposal of banking assets (Sec.
9): According to Sec. 9 “A banking company 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 the period of seven years, to deal or trade in any
such property for facilitating its disposal”.
4. Management (Sec. 10): Sec. 10 (a) states that not less than 51% of the
total number of members of the Board of Directors of a banking company shall
consist of persons who have special knowledge or practical experience in one or
more of the following fields:
(a) Accountancy;
(b) Agriculture and Rural Economy; (c) Banking; (d) Cooperative; (e) Economics;
(f) Finance; (g) Law; (h) Small Scale Industry.
5. Requirements as to minimum paid-up
capital and reserves (Sec. 11):
Sec.
11 (2) of the Banking Regulation Act, 1949, provides that no banking company
shall commence or carry on business in India, unless it has minimum paid-up
capital and reserve of such aggregate value as is noted below:
(a) Foreign Banking Companies: In
case of banking company incorporated outside India, aggregate value of its
paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has
a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs. It must deposit and keep with the R.B.I,
either in Cash or in unencumbered approved securities:
(i) The amount as
required above, and
(ii) After the
expiry of each calendar year, an amount equal to 20% of its profits for the
year in respect of its Indian business.
(b)
Indian Banking Companies: In case of an Indian banking company,
the sum of its paid-up capital and reserves shall not be less than the amount
stated below:
(i) If it has
places of business in more than one State, Rs. 5 lakhs, and if any such place
of business is in Mumbai or Kolkata or in both, Rs. 10 lakhs.
(ii) If it has
all its places of business in one State, none of which is in Mumbai or Kolkata,
Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in
respect of each of its other places of business in the same district in which
it has its principal place of business, plus Rs. 25,000 in respect of each
place of business elsewhere in the State.
(iii) If it has
all its places of business in one State, one or more of which are in Mumbai or
Kolkata, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business
outside Mumbai or Kolkata? No such banking company shall be required to have
paid-up capital and reserve excluding Rs. 10 lakhs.
6. Regulation of capital and
voting rights of shareholders (Sec. 12):
According to Sec. 12, no banking company can carry on business in
India, unless it satisfies the following conditions:
(a) Its
subscribed capital is not less than half of its authorized capital, and its
paid-up capital is not less than half of its subscribed capital.
(b) Its capital consists
of ordinary shares only or ordinary or equity shares and such preference shares
as may have been issued prior to 1st April 1944.
(c) The voting
right of any shareholder shall not exceed 5% of the total voting right of all
the shareholders of the company.
7. Restriction on Commission,
Brokerage, Discount etc. on sale of shares (Sec. 13): According
to Sec. 13, a banking company is not permitted to pay directly or indirectly by
way of commission, brokerage, discount or remuneration on issues of its shares
in excess of 2½% of the paid-up value of such shares.
8. Prohibition of charges on
unpaid capital (Sec. 14): A
banking company cannot create any charge upon its unpaid capital and such
charges shall be void.
9. Restriction on Payment of
Dividend (Sec. 15): According to Sec. 15, no banking company 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.
10. Reserve Fund/Statutory
Reserve (Sec. 17): According to Sec. 17, every banking company
incorporated in India shall, before declaring a dividend, transfer a sum equal
to 25% of the net profits of each year (as disclosed by its Profit and Loss
Account) to a Reserve Fund. The Central Government may, however, on the
recommendation of RBI, exempt it from this requirement for a specified period.
11. Cash Reserve (Sec. 18): Under Sec. 18, every banking company (not
being a Scheduled Bank) shall, if Indian, maintain in India, by way of a cash
reserve in Cash, with itself or in current account with the Reserve Bank or the
State Bank of India or any other bank notified by the Central Government in
this behalf, a sum equal to at least 3% of its time and demand liabilities in
India.
The Reserve Bank
has the power to regulate the percentage also between 3% and 15% (in case of
Scheduled Banks). Besides the above, they are to maintain a minimum of 25% of
its total time and demand liabilities in cash, gold or unencumbered approved
securities.
12. Liquidity Norms or
Statutory Liquidity Ratio (SLR) (Sec. 24):
According to Sec. 24 of the Act, in
addition to maintaining CRR, banking companies must maintain sufficient liquid
assets in the normal course of business. The section states that every banking
company has to maintain in cash, gold or unencumbered approved securities, an
amount not less than 25% of its demand and time liabilities in India.
This percentage
may be changed by the RBI from time to time according to economic circumstances
of the country. This is in addition to the average daily balance maintained by
a bank.
13. Restrictions on Loans and
Advances (Sec. 20): After the Amendment of the Act in 1968, a bank cannot:
(i) Grant loans
or advances on the security of its own shares, and
(ii) Grant or agree to grant a
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 or guarantor;
(c) Any company
of which any of its directors is a director, manager, employee or guarantor, or
in which he holds substantial interest; or
(d) Any
individual in respect of whom any of its directors is a partner or guarantor.
14. Accounts and Audit (Sees.
29 to 34A): The above Sections of the Banking Regulation
Act deal with the accounts and audit. Every banking company, incorporated in
India, at the end of a financial year expiring after a period of 12 months as
the Central Government may by notification in the Official Gazette specify,
must prepare a Balance Sheet and a Profit and Loss Account as on the last
working day of that year, or, according to the Third Schedule, or, as
circumstances permit.
According to Sec.
30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account
should be prepared according to Sec. 29, and the same must be audited by a
qualified person known as auditor. Moreover, every banking company must furnish
their copies of accounts and Balance Sheet prepared according to Sec. 29 along
with the auditor’s report to the RBI and also the Registers of companies within
three months from the end of the accounting period.