SRI KRISHNA ARTS & SCIENCE COLLEGE

[An Autonomous Institution]

LEGAL AND REGULATORY ASPECTS OF BANKING - 22CNU19

III B.COM BI A & B
Unit: I
Lecture 1
Topic: Legal framework of Regulation of Banks

Facilitator
Dr. S. Sangeetha
Associate Professor,
Commerce BPS & BI
SKASC 1
 CONTENTS
• Introduction to legal framework of regulations of banks
• Banking regulation Act 1949.

SKASC 2
 INTRODUCTION
• Banking regulation Act 1949 provides a legal framework to regulate and
supervise the banking activities. It acts as an instruction manual and guiding
the banks.

• RBI Act 1934 empowers RBI to be a guardian of all the banks, issue currency
notes and maintain the financial and economic stability of the country.

SKASC 3
 BANKING REGULATION ACT, 1934

• The Reserve Bank of India Act,1934 was enacted to constitute the Reserve Bank of India with an
objective to

• (a) Regulate the issue of bank notes

• (b) For keeping reserves to ensure stability in the monetary system

• (c) To operate effectively the nation’s currency and credit system

SKASC 4
 BANKING REGULATION ACT, 1934

• The RBI Act covers the constitution, powers, functions of the Reserve Bank of
India.

• The act does not directly deals with the regulation of the banking system except
for few sections like -

Sec.42 which relates to the maintenance of CRR by banks and

Sec.18 which deals with direct discount of bills of exchange and promissory notes
as part of rediscounting facilities to regulate the credit to the banking system.

SKASC 5
 (CONTD)…
The RBI Act deals with:
(a) Incorporation, Capital, Management and Business of the RBI
(b) The functions of the RBI such as issue of bank notes, monetary control,
banker to the Central and State Governments and banks, lender of last
resort and other functions.
(c) General provisions in respect of reserve fund, credit funds, audit and
accounts.
(d) Issuing directives and imposing penalties for violation of the provisions of
the Act

SKASC 6
 BANKING REGULATION ACT−1949
• The Banking Regulation Act, 1949 is one of the important legal frame works. Initially the
Act was passed as Banking Companies Act,1949 and it was changed to Banking
Regulation Act 1949. Along with the Reserve Bank of India Act 1935.

• Banking Regulation Act 1949 provides a lot of guidelines to banks covering wide range
of areas.

• Deposits withdrawal by cheque – U/s 49 A, other than banks, no organisation can

accept deposits, withdrawal by cheque.

• License for Banking - U/s 22 of Banking Regulation Act 1949, RBI licence is required to

commence or carry on Banking Business.

SKASC 7
 (CONTD)…
Some of the important provisions of the Banking Regulation Act 1949 are listed below: -

• The term banking is defined as per Sec 5(i) (b), as acceptance of deposits of money
from the public for the purpose of lending and/or investment. Such deposits can be
repayable on demand or otherwise and withdraw able by means of cheque, drafts,
order or otherwise.

• Sec 5(i)(c) defines a banking company as any company which handles the business of
banking.

• Sec 5(i)(f) distinguishes between the demand and time liabilities, as the liabilities
which are repayable on demand and time liabilities means which are not demand
liabilities.

SKASC 8
 (CONTD)…
• Sec 5(i)(h) deals with the meaning of secured loans or advances.

Secured loan or advance granted on the security of an asset, the market value
of such an asset in not at any time less than the amount of such loan or advances.

Whereas unsecured loans are recognized as a loan or advance which is not

secured.

• Sec 6(1) deals with the definition of banking business

• Sec 7 specifies banking companies doing banking business in India should use at
least on work bank, banking, banking company in its name.

SKASC 9
 (CONTD)…
• Banking Regulation Act through a number of sections restricts or prohibits certain activities for a bank.

For example:

(i) Trading activities of goods are restricted as per Section 8

(ii) Prohibitions: Banks are prohibited to hold any immovable property subject to certain terms and conditions as
per Section 9 .

Further, a banking company cannot create a charge upon any unpaid capital of the company as per Section 14.
Sec 14(A) stipulates that a banking company also cannot create a floating charge on the undertaking or any
property of the company without the prior permission of Reserve Bank of India.

(iii) A bank cannot declare dividend unless all its capitalized expenses are fully written off as per Section 15.

SKASC 10
 Other important sections of Banking Regulation
Act, 1949
• Sections 11 and 12 deals with the Paid up Capital, Reserves and their terms and conditions, Sec 18
specifies the Cash Reserve Ratio to be maintained by Non-scheduled banks and Sec 19 (2) clarifies about
the share holding of a banking company.

No banking company shall hold shares in any company, (either as pledge, or mortgagee or absolute
owners of any amount exceeding 30% of its own paid up share capital plus reserves (or) 30% of the paid up
share capital of that company whichever is less

• Section 24 specifies the requirement of maintenance of Statutory Liquidity Ratio (SLR) as a percentage (as
advised by Reserve Bank of India from time to time) of the bank’s demand and time liabilities in the form of
cash, gold, unencumbered securities

SKASC 11
 Other Compliance Requirements
Section 29 – Every bank needs to publish its balance sheet as on March 31st Section 30(i)

Audit of Balance sheet by qualified auditors Section 35 gives powers to RBI to undertake
inspection of banks Other various sections deal with important returns which are to be submitted
by banks to Reserve Bank of India

Return of bank’s liquid assets and liabilities (Monthly)

Return of bank’s assets and liabilities in India (Quarterly)

Return of unclaimed deposits of 10 years and above (Yearly) With changing time and
requirements from time to time, various other compliance issues which need to be handled by
banks, have been amended/incorporated relating to: – Nomination facilities

Time period for preservation of bank books/records

SKASC 12
 MAIN OBJECTIVE OF THE ACT
• To ensure sound banking through regulation covering the opening of
branches and maintenance of liquid asset .

• Sec−6 Permitted business of Banks

• Banking for borrowing, raising or taking up of money, selling, collecting and

dealing in bills of exchange, promissory notes, railway receipts. Dealing in
shares, bonds and debentures.

• Acting as agents for government

• Contracting for public and private loans and issuing the same.

13
SKASC
• Managing, selling and realizing any property which may come into the possession of the
company .

• Undertaking and executing trusts.

• Establishing and supporting or aiding in the establishment and support of associations,

institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees
of the company or the dependents or connections of such persons;

• Granting pensions and allowances and making payments towards insurance; subscribing to or
guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any
public, general or useful object;

• Dealing with Acquisition, construction and maintenance of building.

SKASC 14
BUSINESS PROHIBITED FOR BANKS

• No banking company shall directly or indirectly deal in the buying and selling
or bartering of goods or engage in any kind of trade or buy.

SEC -19 - RESTRICTION ON SUBSIDIARY COMPANIES

• Banking company shall not form any subsidiary company

UNDER FOLLOWING CONDITIONS

• Sub − Section (1) of Sec − 6 is permissible with the permission in writing of

RBI.

• Reserve bank may with prior approval of the central government (To spread
the banking in India)

SKASC 15
 MCQ

1. The primary purpose of RBI monetary policy

a. Price Stability b. Exchange Rate c. Growth Rate d. Inflation

2. Advances against their own shares are not allowed by banks because these are prohibited under

a. RBI Act 1934 b. Negotiable Instrument Act 1881 c. SEBI Act 1992 d. Banking Regulation Act 1949.

3. RBI can carry out inspection of any bank under section _____ of Banking Regulation Act.

a. 33 b. 32 c. 31 d. 35

4. While a banking company can undertake trading in securities but it cannot trade in goods under the provision of which of the
following

a. RBI Act b. Banking Regulation Act c. Indian Contract Act d. Companies Act 2013

5. Under the Banking Regulation Act 1949 which of the following is not qualified to be called as banks in the co-operative sector

a. Urban Co-operative Banks b. Primary Agricultural Credit Societies c. State Co-operative Banks d. Central Co-operative
Banks.

SKASC 16
 NEXT CLASS TOPIC

• CONTROL OVER ORGANISATION OF BANKS

SKASC 17