BANKING REGULATION

ACT, 1949
PRESENTATION BY:
KAJAL BANSAL
B.COM, CA INTER
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 or otherwise.
• Banking Company means any company which transacts the business of banking
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 public merely
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 TRADING ACTIVITIES

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, sell or
barter goods for others otherwise than:
• In connection with bills of exchange received for collection or negotiation, or
• With such of its business as referred to in Section 6(1)(i).
But this prohibition does not apply where a banking company is authorized by CG
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 IMMOVABLE PROPERTY

Section 9 provides that a banking company can hold any immovable property only
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 extension would
be in the interests of the depositors of the banking company.
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 in the
aggregate two and a half percent of the paid-up value of the said shares.
CHARGE ON FLOATING ASSETS

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 such debts has been
made to the satisfaction of the auditor of the banking company.
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&L A/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) shall not
apply to the banking company for such period as may be specified in the order.
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 the banking
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 by such
period as it thinks fit or condone any delay in the making of such report.
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
MAINTENANCE OF CASH RESERVE

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.
MAINTENANCE OF CASH RESERVE

 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 OF SUBSIDIARY

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 BY RBI

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 APPROVAL OF
RBI
Section 20A(1): Except with the prior approval of RBI, a banking company shall not
remit in whole or in part any debt due to it by:
 Any of its directors
 Any firm or company in which any of its directors is interested as Director,
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 be void
and of no effect.
POWER OF RBI TO REGULATE ADVANCES

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 is excessive.
The provisions of this section have overriding effect over Usurious Loans Act, 1918,
or any other law relating to indebtedness in force in any State.
Thus, court cannot take any action against the bank.
REMOVAL OF MANAGERIAL PERSONNEL BY
RBI
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 PERSONNEL BY
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 aforesaid or
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 in the
management of the banking company.
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 continues
Fine
• Notwithstanding anything contained in any law
Loss of or in any contract, memorandum or articles of
association, the person shall not be entitled to
Office claim any compensation for 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 ADDITIONAL DIRECTOR

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

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 as RBI
may specify;
 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;
 Shall not be required to hold qualification shares in the banking company.
Such additional directors shall not be considered for the purpose of reckoning any
proportion of the total number of directors of the banking company.
POWER OF CG TO ACQUIRE BANKING
BUSINESS
Section 36AE: On the basis of report of RBI, if CG is satisfied that a banking
company:
 Failed to comply its directions > 1 occasion
 Managed in a manner which is detrimental to the interest of depositors.
Option 1:
 CG, in consultation with RBI, may acquire undertaking of such Co., including all
its assets & liabilities.
 Thereupon, all assets & liabilities of acquired bank shall stand transferred to CG.
POWER OF CG TO ACQUIRE BANKING
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!!!