Banking Regulation Act—Regulating Banking in India

The Banking Regulation Act 1949 is a component of central legislation that governs all Indian banking institutions. It is known as the Banking Companies Act and is one of the essential pieces of banking legislation. It went into effect on March 16, 19.49, but was later renamed the Banking Regulation Act in 1966.

Since 1956, it has been in effect in Jammu & Kashmir. Initially, the requirements of this legislation exclusively applied to financial institutions. However, following the 1965 modification, it also applied to cooperative banks.

The Reserve Bank of India has the authority to establish banks and supervise their shareholdings under the Banking Regulation Act. It also gives the RBI authority over board appointments and management. The RBI can also give auditing instructions, merger and liquidation controls, and banking policy directions.

Objectives of the Banking Regulation Act

The Banking Regulation Act got enacted with the following objectives in mind:

  • To provide precise legislation with comprehensive provisions, especially for the banking industry in India.
  • To prevent bank failures by establishing minimum capital requirements.
  • To assist banking companies in developing in a balanced way.
  • To provide the RBI with the approving the appointment, reappointment, and dismissal of bank chairman, directors, and officials.
  • To protect depositors’ interests.
  • To assist in the strengthening of the country’s financial system
  • To establish the banking laws in India

Salient features of the Banking Regulation Act

  • A broad definition of banking is to put any entities that accept deposits, refundable on demand or otherwise, for lending or investment within the ambit of the law.
  • Non-banking institutions are prohibited from accepting demand deposits.
  • Trading is prohibited from removing non-banking concerns.
  • Minimum capital requirements are imposed.
  • Dividend payouts are being restricted.
  • Inclusion of banks established outside India’s provinces in the scope of the law
  • Implementation of a comprehensive licensing system for banks and their subsidiaries
  • Prescription of a specific type of balance sheet and the Reserve Bank’s authority to demand periodic returns
  • The Reserve Bank inspects a bank’s books and accounts.
  • Providing the central government with the authority to take measures against banks that conduct business in a way that is harmful to depositors’ interests
  • Provision for increasing the RBI’s interaction with financial institutions.
  • Provision of a fast-track liquidation procedure.
  • Including the Indian Reserve Bank in Bill’s provisions
  • Increasing the Reserve Bank of India’s capabilities to aid banks in times of crisis.

Important provisions of Banking Regulation Act 1949

  • Section 5 of the Banking Regulation Act describes the terms banking and banking firm, among other things.
  • A banking corporation is prohibited from buying, selling, or bartering products, either directly or indirectly, under section 8 of the Act. However, it may do so, when dealing with bills of exchange obtained for collection or negotiation.
  • A financial corporation cannot retain any immovable property, no matter how acquired, for more than seven years from the day of acquisition, according to section 9. However, if the immovable property is for the banking company’s purpose, it can be owned by the bank. It must also deal with, trade, or assist in the disposition of immovable property.
  • Section 10 prevents a banking firm from engaging a managing agent, a director of another company, or any other individual listed in the section.
  • Section 10A mandates that a minimum of 51 per cent of a financial company’s Board of Directors include people with specific expertise or practical knowledge in the areas covered by this section.
  • The financial corporation must be supervised by a full-time Chairman, according to Section 10B.
  • Section 11 states that a banking firm can only start or continue doing business in India if it has a certain paid-up capital and reserve following the rules of this section.
  • A banking business cannot pay more than 2.5 per cent of the price of shares in commissions, discounts, compensation, or brokerage, either explicitly or implicitly, according to section 13.
  • Section 15 places restrictions on the dividend payments by a banking firm. It specifies that a bank must not issue a dividend on its share until all of its costs have been wiped down completely.
  • As per Section 17, every banking company must establish a reserve fund. This fund can also be established using year-end profits and must account for at least 20% of those profits.
  • According to Section 18 of the Banking Regulation Act, every banking company in India, excluding a scheduled bank, is mandated t to have a cash reserve daily. This sum must be equal to a percentage of the banking company’s demand and time obligations as determined by the RBI and must be submitted by the 20th of each month.
  • Every banking company formed in India must compile and present a financial statement and a profit loss statement on the last working day of the financial year, according to Section 29.

Penalties imposed under the Banking Regulation Act

  • When filing income tax returns or furnishing income statements, a person who intentionally or inadvertently omits information or sources of income in the balance sheets faces a maximum jail term of three years and a monetary fine.
  • If a person fails to present documents, account statements, or income reports that he is required to provide under Section 35 of the act, or if he fails to provide a reasonable explanation of his possessions to the inspection officer, he can get fined up to Rs 2,000 per offence.

    If the person does not follow the processes, a fine of up to Rs. 100 per day may be imposed, as well as the continuation of the infraction.

  • If the bank accepts deposits in violation of Section 35(4)(A) instructions, the directors and officials are liable for a penalty of up to twice the amount received in deposits until they can show that they were not informed of the implications.
  • If a person does not conform with the orders, directions, or any rule made or imposed, or if any breach has already been made in bringing out the terms or commitments given under Section 45(7), the person will be punished with a fine of up to Rs 50,000 or double the sum of the default or contravention, plus an extra charge of Rs 2,500 per day until the direct violation or default ends.
  • The RBI may levy a penalty if a person or company fails to comply with the bank’s terms or orders. In such a circumstance, each employee or associate of the organisation is held to be culpable just at the time of the occurrences and is subject to punishment.
  • Where a company commits a default or contravention, and it is proved that the default occurred with the permission of or due to gross incompetence on the part of any director, secretary, or other supervisors, such officers or directors shall be punished, notwithstanding anything mentioned in sub-section 5 of Section 46.

Amendments to Banking Regulation Act

Initially, the law solely applied to financial institutions. However, in 1965, the Banking Regulation Act was revised to include cooperative banks as part of its scope by adding Section 56. The state government creates and manages cooperative banks that function only in one state. However, the RBI is in charge of licences and also oversees corporate activities.

The Banking Act was enacted as a complement to prior banking legislation. The Lok Sabha recently amended the Banking Regulation Act, 1949, and the Banking Regulation (Amendment) ordinance was repealed and replaced in June 2020 by a bill with the same effect.

The legislation will place cooperative banks within direct RBI supervision and subject them to some of the same management practices as commercial banks. It will also enable the RBI to incorporate or restructure a troubled cooperative bank without initially placing a moratorium. These adjustments are to protect depositors’ interests.


There were numerous inconsistencies in the banking sector before the enactment of the Banking Regulation Act of 1949. It was disorganised and a complete flop. The Act’s enactment controlled banking institutions’ operation and maintained the banking sector’s development and equilibrium. The granting of powers to the RBI to supervise banks and their operations was a turning point. The RBI is the governing body of this Act, which has gathered all banking firms under one roof.

FAQs on the Banking Regulation Act

What year did the Banking Regulation Act take effect?

16th March 1949

What does section 6 of the banking regulation act deal with?

It is concerned with the types of business that banking companies may conduct.

What does section 9 of the banking regulation act deal with?

It deals with non-banking asset disposition.

Which section provides the cash reserves?

Section 18

Which part of the banking regulation act prescribes power to rbi for exercising control over the management of banking companies?

Part II-A

Who is responsible for the management of a banking company?

A whole-time chairperson will be responsible for managing a full-time banking company.

About Author

A law aspirant and a final year student at Lloyd Law College.

I always had an inclination towards corporate and commercial laws because of their impressive and organized work structure with everyday challenges.

I am a dedicated person who is able to express honest opinions and keep patience in stressful situations.

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