THE BANKING REGULATION ACT 1949 - Important Sections

The act came into force w.e.f 16.03.1949. It extends to whole of India (made applicable to J&K in 1956). The Act was passed as “The Banking Companies Act, 1949” which was later named as “The Banking Regulation Act 1949” w.e.f. 01.03.1966. Important sections of the act are:

Section 5: Contains definition of Banking, Banking Company , secured loans or advances

Section 6: Describes the forms of business in which a banking company may engage in addition to the Banking Business. 

Section 7: Use of Word Banking: Banking company carrying on banking business in India to use at least one word, bank, banker, banking, or banking company in its name.

Section 8: Prohibition of trading: restricts/prohibits business like trading for goods etc.

Section 9: No Banking company shall hold any immovable property howsoever acquired except as is acquired for its own use for a period exceeding 7 years from the date of acquisition. RBI can further grant extension for a period not exceeding 5 years.

Section10: Management: Prohibitions on employment of managing agents and restriction on certain form of employment.

A person adjudicated insolvent, convicted for an offence involving moral turpitude, or one who has suspended payment or has compounded with his creditor cannot be employed by the banking company. Every Banking Company should be managed by a whole time Chairman Term of office at any one time cannot exceed 5 years.

Section11: Requirement as to minimum paid up Capital and Reserves

Domestic Banks – Min. – Rs. 5 lac

Foreign Banks - Min. – Rs. 15 lac (Rs. 20 lac for business in Mumbai or Kolkata)

Section12: Regulation of paid up capital, subscribed capital and authorized capital and voting rights
Subscribed capital should not be less than 1⁄2 of its authorized capital

No person shall have voting rights in excess of 10% of total voting rights of all the members.

Section 13: Commission / brokerage, discount etc. on sales of shares; cannot pay more than 2.5% of paid up value of one share.

Section14: Prohibits a banking company from creating a charge upon any unpaid capital. 14A Prohibits a banking company from creating a floating charge on the undertaking or any property of the company without the permission of RBI

Section 15: Restrictions as to payment of dividend: Prohibits payment of dividend until all its capitalized expenditure has been completely written off.

Section 17: Every banking company to create reserve fund and 20% of its profits should be transferred to this fund before any dividend is declared.

The appropriation of any sum from the reserve fund or share premium account is to be reported to Reserve Bank, within 21 days from date.

Section 18: Cash Reserve: Non scheduled banks to maintain 3% of the demand and time liabilities by way of cash reserves with itself or by way of balance in a Current Account with RBI.

Section 20: Restrictions on loans and advances: Banks cannot grant loans against security of their own shares.

Section 21: Empowers the RBI to issue directives to banks to determine policy for Advances.

Section 22: Empowers RBI to issue license for opening a bank.

Section 23: Empowers RBI to grant license for opening of branches

Section 24: Statutory Liquidity Ratio--Every bank has to maintain liquid assets in form of cash, gold & unencumbered approved securities at the close of any business which is minimum of certain percentage.

Section 26: Return of unclaimed deposits (10 years and above) within 30 days of close of each calendar year.

Section 31: To publish Balance Sheet and Auditors report within 3 months from the end of period to which they refer.

Section 35: Authorizes RBI to undertake inspection of banks and give appropriate directions.

Section 45: Enpowers RBI to apply to Central Govt. for suspension of business by a Banking company and to prepare scheme of amalgamation.

Section 45Y: Empowers Central Govt. to frame rules specifying the period for which a bank shall preserve its books.

Section 45Z:Returning a paid instrument to a customer after keeping true copy.

Section 45ZA to 45ZF: Nomination Facility

Section 47A: RBI can impose penalty for various kinds of violations.

Section 49A: No person can accept deposit of money withdrawable by cheque other than a banking company/RBI/ SBI.