Module 2

Provisions of Banking Regulation Act, RBI Act, Prudential norms –

Narsimhan committee recommendations, Basel I Basel II and Basel III
norms on Capital Adequacy Ratio, Risk weighted assets .
 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
its 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.
 Features of Banking Regulation
Act, 1949
The Act has been divided into five parts and comprises 56 sections. 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.
 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
Important Provisions of the Banking
Regulation Act, 1949
1. Definitions
• 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
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.
2. 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; trading in stocks and funds; and buying or selling foreign exchange
bonds, debentures; managing agency activities such as clearance and shipment of
goods; managing guarantee and indemnity, etc.
3. 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.
4. 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.
5. Minimum Paid-up Capital and Reserves
• According to Section 11, a banking company’s paid-up capital should not be more
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.
• 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.
6. 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 its own paid-up
capital.
7. 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.
8. 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.
On the other hand, a new branch may open for only a short period of
not more than a month.
9. Accounts and Balance Sheet
• As per Section 29, a banking company incorporated in India, is
required to prepare, at the end of each accounting year, a Balance sheet
and profit and Loss Account as on the last working day of the year.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. Payment of Dividends
• Banking companies must pay dividends only when all the capital expenses have
been paid. Dividends must not be paid until the value of investments in
approved securities, shares, bonds, or debentures has declined and is written off.
17. 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.
18. 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.
 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 and imprisonment of the same. The following is mentioned
in Section 46:
• In case a person purposefully presents false information or promotes fraudulent acts,
they risk 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 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
Reserve Bank of India Act, 1934
Reserve Bank of India (RBI) Act, 1934 - Overview
• The Reserve Bank of India Act, 1934, is the legislative framework
under which the Reserve Bank of India (RBI) was established and
operates. This Act provides the basis for the functioning, powers, and
responsibilities of the RBI as the central bank of India.
1. Historical Background:
• The Act was enacted on March 6, 1934, and came into effect on April
1, 1935.
• The Act's primary objective was to establish a central bank in India to
regulate the issue of banknotes and maintain reserves with a view to
securing monetary stability in India.
2. Structure of the RBI Act:
• The RBI Act is divided into several chapters and sections, each
addressing different aspects of the RBI’s operations.
• It covers topics like the constitution of the RBI, its general powers and
functions, regulations for currency issuance, and the bank's role in
managing public debt.
3. Key Provisions:
a. Establishment and Incorporation (Sections 3-4):
• The Act led to the formation of the Reserve Bank of India as a body corporate with
perpetual succession.
b. Central Banking Functions (Sections 20-45):
• The RBI is vested with the responsibility of regulating the issue of currency in India,
managing foreign exchange, and serving as the banker to the government and other
banks.
• The Act provides the RBI with the authority to formulate and implement monetary
policy in India.
c. Powers Concerning Banking Regulation (Section 45A to 45ZB):
• The RBI Act grants the central bank powers to regulate the banking industry,
including licensing of banks, prescribing regulations, and enforcing them.
• The Act also empowers the RBI to regulate non-banking financial companies
d. Control Over the Monetary System (Section 22-27):
• The RBI has the exclusive right to issue currency notes in India.
• The Act outlines the process for the issuance, withdrawal, and
regulation of currency.
e. Public Debt Management (Section 21-22):
• The RBI is responsible for managing the public debt of the
government of India.
f. Miscellaneous Provisions:
• The Act contains various other provisions related to the conduct of
business by the RBI, audits, and the relationship between the RBI and
the government.
4. Amendments to the RBI Act:
• Over the years, the RBI Act has been amended multiple times to adapt
to the changing economic environment and financial landscape. Key
amendments include the introduction of the Monetary Policy
Committee (MPC) in 2016.
5. Significance:
• The RBI Act is crucial for ensuring the stability of India’s financial
system. It provides the RBI with the legal framework to carry out its
functions effectively, such as controlling inflation, managing the
currency, and ensuring the stability of the banking sector.