The Banking Regulation Act, 1949

The Banking Regulation Act, 1949 supervises the banks that have been established in India. This acts
as in charge of regulating and managing the operations of all banking corporations in India.
The RBI is the governing body that regulates the banks. The introduction of Section 56, gave the
Reserve Bank of India the authority to regulate co-operative banks and their operations in the same
way other banks in the country are functioning. This Act also gives RBI, the authority to license
banks, regulate shareholder voting and shareholding, oversee board and management
appointments, and set auditing instructions. RBI is also involved in mergers and liquidations of the
banks.

1. Features of the Banking Regulation Act, 1949

The Act has 56 sections and 5 schedules. The main features of the act are mentioned below:
 It prevents non-banking enterprises from taking demand-repayable deposits.
 It restricts trading related to non-banking entities to remove potential risks.
 It also establishes minimum capital requirements for the bank.
 It limits dividend payouts of the bank.
 This act provides the legal framework for banks registered outside of India's provinces.
 It helps in implementing an extensive licensing program for banks and their branches.
 It determines a unique format for the balance sheet and gives the Reserve Bank
authority to call for periodic reports.
 This act gives the Reserve Bank the right to examine a bank's books of accounts.
 Enabling the central government, the authority to take action against banks that
conduct in a way that harms depositors' interests.
 A clause that calls for the Reserve Bank of India to communicate with banking
institutions regularly.
 This act also establishes a quick liquidation procedure for the bank.
 It increases the capability of the Reserve Bank of India to assist banking institutions
when emergencies arise.

2. Objectives of the Banking Regulation Act, 1949

 To prevent banking companies from engaging in fierce competition, this act regulated
the opening of new branches and the relocating of existing ones.
 To ensure the balanced growth of banks through a licensing system and to stop the
indiscriminate openings of additional branches.
 To assign RBI the authority to appoint, remove, and reappoint the chairman, directors,
and bank officers. This might help in the effective and smooth functioning of Indian
banks.
 To safeguard the interests of depositors and the general public by implementing certain
measures which include maintaining ratios for cash reserve and liquidity reserve. This
enables the bank to meet the demand of depositors.
 To strengthen India's financial system by mandating the merging of weaker banks
with senior banks.
 To include certain clauses that can limit the ability of foreign banks to invest funds from
Indian depositors outside of India.
 To assist banks in quick and easy liquidation when they are unable to continue or merge
with other banks.

3. Important Provisions of the Banking Regulation Act, 1949

The Banking Regulations Act, 1949 provides definitions for several terminology, including branch
offices, banking companies, and banking. Under this act, a company engaged in banking activities

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 within India is called a Banking Company. Bank includes the acceptance of public deposits of money
for lending or investment that can be repaid on demand. As per the State Bank of India (Subsidiary
Banks) Act, 1959, subsidiary banks are defined in the same way. An advance or loan secured against
the security of assets is a secured loan or advance.
The 1965 Amendment to the Banking Regulation Act made changes to include cooperative societies
in banking regulations.

4. Business which can be undertaken by the Banking Companies

A banking company may engage in the following activities under Section 6(1):
 borrowing or lending money;
 purchasing or disposing of bills of exchange, promissory notes, coupons, drafts, bills of
lading, railway receipts, warrants, and debentures;
 managing, selling and realising any property which may come into the possession of the
company in satisfaction or part satisfaction of any of its claims;
 trading in stocks and funds;
 buying or selling foreign exchange bonds, debentures;
 managing agency activities such as clearance and shipment of goods;
 issuing and managing guarantee, letter of credit, and indemnity;
 locker services, etc.

5. Prohibition of Trading
As per Section 8 of this Act, trading is not permitted. Banking companies are prohibited from
engaging in the purchasing, selling, or bartering of products unless they are selling goods held in its
security. In addition, the bank is prohibited from trading, buying, selling, or bartering anything other
than bills of exchange that are obtained through negotiation or collection.

6. Section 9 of the Banking Regulation Act allows the Reserve Bank of India to give licenses to banks
so they can do banking work.

7. Management of Bank
As specified by Section 10 of the Act, the bank should not employ managing partners or be
employed by them. An individual whose compensation is dependent on the company's profitability
or who has been declared insolvent should not be employed by the bank. A minimum of 51% of the
board's members must have professional expertise in fields such as accounting, small-scale industry,
banking, cooperatives, agriculture, rural economy, economics, and finance. In addition, the
director's tenure should not exceed eight years.

8. Minimum Paid-up Capital and Reserves

According to Section 11, a banking company's paid-up capital should not be less than Fifteen Lakhs
if it was incorporated outside of India, and Twenty Lakhs if it holds its principal place of business in
Calcutta, Bombay, or both.
The minimum paid-up capital required for a company that is incorporated in India and has branches
in multiple states is five lakhs of rupees.
If the company's place of business is located in Bombay, Calcutta, or both, it must have ten lakhs of
rupees as minimum paid-up capital.
If a company maintains all of its branches within the same state, none of which are located in
Bombay or Calcutta, the paid-up capital requirement is one lakh rupees for the company's principal
place of business, ten thousand rupees for each branch located within the same district as the
principal place of business, and twenty-five thousand rupees for each branch located outside of the
same district.

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 The company's paid-up capital and subscribed capital cannot be less than half of the authorised
capital or subscribed capital, respectively. The bank cannot place a charge on unpaid capital.
A minimum of twenty percent of the company's annual profits must be transferred to the Reserve
Fund. The banking company is required to notify the RBI of the Reserve Fund's allocation within
twenty-one days of the date of appropriation.
As per RBI guidelines issued in 2016 the initial minimum paid-up voting equity capital for a bank
shall be ₹5 billion. Thereafter, the bank shall have a minimum net worth of ₹5 billion at all times.

9. Limitations on the Nature of Subsidiary Companies

A Banking Company should not establish a subsidiary unless the company is being used for a
business venture or the Reserve Bank of India has granted written permission. The banking company
can hold up to 30% of the company's paid-up share capital or 30% of its own paid-up capital and
reserve whichever is less.

10. Licensing of Banking Companies

Banking companies are not permitted to conduct business in India unless they hold an RBI license.
The RBI can grant the license after the books of accounts have been inspected. If the company stops
conducting banking operations in India, RBI has the authority to terminate the license.

11. Opening of New Branches and Transfer of Existing Branches

A Banking Company must have RBI approval before starting a new branch or moving an existing
branch to a new city, town, or state. Without RBI's prior approval, no banking company with its
headquarters in India may operate a new branch outside of the country.

12. Accounts and Balance Sheet

On the last working day, the banking companies must create a balance sheet and a profit and loss
account.

13. Inspection
RBI has the authority to order a banking company inspection and is required to send the company a
report. The directors must bring all books, accounts, and documents related to the banking company
must be submitted for investigation.

14. RBI's Authority to give Instructions

If RBI believes that giving instructions to a banking company is in the public interest or will prevent
the company from conducting harmful business, it may do so regularly.

15. Prohibition of Specific Operations by the Banking Company

The banking company is not allowed to prevent anyone from entering its location of business. It is
not permitted to keep anything violent in the workplace. If the bank violates any of the mentioned
acts, it is accountable under Section 36AD.

16. Powers and Functions of RBI

The powers of RBI are mentioned in Section 36. The Reserve Bank has the authority to advise
banking companies and prevent them from engaging in certain transactions. Further, as per Section
18, it can help the banking institution by providing advances or loans. Reserve Bank of India can
also order the banking company to organise a meeting of its directors to consider company issues.
It may also designate officials to look after the operations of a banking company.

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17. Business Suspension
The financial company may request a pause in operations from the High Court if it is unable to fulfill
its obligations temporarily. The High Court may approve the pause in action and put an end to the
proceedings temporarily. The pause in operations cannot last more than six months. The RBI report
certifies that the banking company will be able to pay its debts is the only way that makes the
banking company valid.

18. Acquisition of the Undertakings of Banking Companies

The central government must establish banking companies after consultation with the Reserve Bank
of India. The process can be completed once the financial businesses have been given the chance
to show their reasons for carrying the business.

19. Payment of Dividends

Banking companies must pay dividends only when all the capital expenses have been paid.
Dividends must not be paid if the value of investments in approved securities, shares, bonds, or
debentures has declined and is written off.

20. Reserve Fund

Every single banking company is required to establish a reserve fund and allocate at least 20% of its
profits to it. If the bank appropriates any funds from the reserve fund, it must inform the Reserve
Bank. But as per RBI guidelines this rate is 25%.

21. Power of Central Government with Respect of the Liquidation of Companies

If the banking companies have violated the Insolvency and Bankruptcy Code, of 2016 the Central
Government may direct the RBI to start the process of insolvency.

22. Offences and Punishments under the Banking Regulation Act, 1949
The Act contains several provisions which describe the consequences of violation of the act,
including fines & imprisonment of the same. The following is mentioned in Section 46:
 In case a person purposefully presents false information or promotes fraudulent acts,
then the person shall be punishable with imprisonment of up to three years and a fine
of up to one crore rupees.
 In case a person does not share the records or documents or refuses to answer the
inquiries of the inspection officer, then a fine of up to twenty lakh rupees, and another
fine of fifty thousand rupees every day in case of continuing offence.
 In case the banking company has received any deposits illegally, all of the directors will
be held accountable and charged twice the value of the deposits made with the banking
company.
 In case there is a default and it is caused by the banking company, or by
directors' negligence, then the directors or the secretary will be held responsible for the
same.
The Banking Regulation Act of 1949 is essential for governing banks in India. With its rules and
objectives focused on stability, protecting depositors, and promoting good banking practices, it
keeps the banking system reliable and trustworthy for everyone involved.

23. Income Recognition-

A Bank's advances are to be classified into performing assets and non-performing assets (NPA). NPA
is defined as any credit facility in respect of which interest or/and installment remain overdue for a
period of more than 90 days.

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 Interest on performing assets should be recognised on accrual basis, but interest on NPA should be
recognised on cash basis.

24. Advance classification: Bank should be classifying their advances into four broad groups-
i) Standard Assets: Standard assets is one of which does not disclose any problems and which does
not carry more than normal risk attached to the business. Such an asset is not a NPA as discussed
earlier.
ii) Sub-standard Assets: Sub-standard asset is one which has been classified as NPA for a period not
exceeding 12 months.
iii) Doubtful Assets: A doubtful assets is one of which remained in sub-standard category for a period
exceeding 12 months.
A loan classified as doubtful has all the weakness inherent in that classified as sub standard with
the added characteristic that the weakness makes collection or liquidation in full, on the basis of
currently known facts, conditions and values, highly questionable and improbable.
iv) Loss Assets: A loss asset is one where loss has been identified by the bank or internal auditors or
the RBI inspection but the amount has not been written off, wholly or partly. In other words, such
an asset is considered un-collectible and of such little value that its continuance as a bankable
asset is not warranted although there may be some salvage or recovery value.

25. Provisioning for loans and advances

Taking into account the time lag between an account becoming doubtful of recovery, its recognition
as such, the realisation of the security and the erosion over time in the value of security charged to
the bank, banks should make provision against sub-standard assets, doubtful assets and loss assets on
the following basis:
(i) Loss assets: The entire assets should be written off. If the assets are permitted to remain in the
books for any reason, 100% of the outstanding should be provided for.
(ii) Doubtful assets: (a) 100% of the extent to which the advance is not covered by the realizable value
of the security to which the bank has a valid recourse and the realisable value is estimated on a
realistic basis.
(b) Over and above item (a) above, depending upon the period for which the asset has remained
doubtful, 25% - 100% of the secured portion (i.e. estimated realisable value of the outstanding)
on the following basis:
Period for which the advance has % of
been considered as doubtful . Provision
Up to one year 25
One to three years 40
for More than three years 100

(iii) Sub-standard assets - A general provision of 15% of total outstanding. Unsecured exposure, which
are identified as substandard would attract additional provision of 10% i.e. a total of 25% on the
outstanding balance. Unsecured exposure is defined as an exposure where the realisable value of
security is not more than 10% of the outstanding exposure.
(iv) Standard Assets - A general provision of 0.40% of total outstanding should be made.

26. Cash Reserve Ratio

Every Banking company has to maintain in India cash with RBI in current account @ x% of demand and
time liability in India as on the last Friday of second preceding fortnight. The rate is subject to revision
by RBI from time to time. If the rate is not given it may be assumed to be 4%.

27. Statutory Liquidity Ratio

Banking companies have to maintain sufficient liquid assets in the form of

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  Cash
 Balance with Bank, Money at call and short notices
 Gold
 Unencumbered approved securities,
to the extent of y% of demand and time liability in India. The rate is subject to revision by RBI from
time to time. If the rate is not given it may be assumed to be 18%.

28. Capital Adequacy Ratio

Capital adequacy ratio is a measure to check financial solvency of banks suggested by Bank Committee.
As per the prudential norms of RBI all scheduled banks (excluding regional rural banks) and foreign
banks operating in India are required to maintain Capital Adequacy Ratio of 9% whereas for public
sector banks it is 12%.
Capital Funds X 100
Capital Adequacy Ratio =
Risk Weighted Assets and off Balance Sheet items

Problems
1. Give below interest on advances of a commercial bank (` in lacs)
Performing Assets NPA
Interest Interest Interest Interest
Earned Received Earned Received
Term Loans 120 80 75 5
Cash credits and overdrafts 750 620 150 12
Bills purchased and discounted 150 150 100 20
Find out the income to be recognised for the year ended 31st March, 2024.

2. From the following information find out the amount of provisions to be shown in the Profit and Loss
Account of a Commercial Bank:
` in lacs
Assets:
Standard 4,000
Sub-standard 2,000
Doubtful (Secured):
Upto one year 900
Upto three years 400
More than three years 300
Loss Assets 500